In an option position, it can be helpful to view changes in the stock price as the primary source of risk to the trade. The only reason for taking this perspective is that it helps us better understand the significance of the profit or loss caused by implied volatility and time decay.
Implied volatility and time decay are, themselves, sources of risk. In addition to viewing them that way, we can also view them as producers of cost and compensation for changes in the "primary risk", which is posed by the underlying stock. When you look at it this way, you can think in terms of getting under-paid or over-paid for changes in the primary risk. This, in turn, may suggest the extent to which your options are expensive or cheap. Logical ways, such as this, for determining whether an option is relatively cheap or expensive is the name of the game. Concluding that an option is worthy of buying (it's cheap) or selling (it's expensive) is what will drive your trading decisions for the most part.
The figure to the right is an example of how ChartBender's Opiumtm trade management technology breaks down the cost/compensation of an option position. The bar on the far right, showing the $35 loss, is the realized risk from movement in the stock price. Keep in mind that changes in stock price can also generate profits.
