The price of an option has two components, the intrinsic value and the time value. The intrinsic value of an option is the difference between the actual price of the underlying security and the strike price of the option. The time value is determined by the remaining lifespan of the option, the volatility and the cost of refinancing the underlying asset (interest rates). For example:
|Option||Strike||Option Premium||Stock||Intrinsic Value||Time Value|
Longer-term calls, both American and European, typically have more value than short-term calls because there is more time to have an event that can occur to make them go in the money. In addition, they can be worth no less than their short-term cohorts. The same is true concerning American puts. However, European puts can only be exercised on the maturity date. If the put were to go into the money, one could exercise that option and receive the funds before the maturity date - that money could then be invested in another asset. Consequently, with the European put an investor has to wait to receive the funds and loses those extra days to earn additional income.
TradingGet the basics under your cap before you get into the game.
TradingThe primary drivers of an option’s price are the underlying stock’s current price, the option’s intrinsic value, its time to expiration and volatility.
TradingTake advantage of stock movements by getting to know these derivatives.
TradingThe price of an option, otherwise known as the premium, has two basic components: the intrinsic value and the time value. Understanding these factors better can help the trader discern which ...
TradingThe ability to exercise only on the expiration date is what sets these options apart.
TradingLearn more about stock options, including some basic terminology and the source of profits.
TradingThe strike price of an at-the-money options contract is equal to its current market price. Options that are at the money have no intrinsic value, but may have time value.