Options Basics Self Study Notes

trump

Well-Known Member
#1
Well I am starting out on options. Will be indexing different theoretical materials from various resources.Any one can join give more inputs and insights.Thanks.:D
 

trump

Well-Known Member
#3
An In-the-Money option has a strike price which, for Calls, is below the present market price and, for Puts, is above the current market price.

If an option strike is ITM that option has what I call inherent value. So for a call (the right to buy), the strike is ITM if the call has intrinsic/inherent value. Since a call is a right to buy, it has inherent value if you can use that call (exercise it) to buy the stock for less than the market price. In the case of a put (the right to sell), it has inherent value if you can use that put to sell stock at more than the market price.


An Out-of-the-Money option has a strike which, for Calls, is above the present market price and, for Puts, is below the current market price.It has only Time Value, and no intrinsic value.Out-of-the-money options have zero intrinsic value. Their entire premium is composed of only time value. Out-of-the-money options are cheaper than in-the-money options as they possess greater likelihood of expiring worthless.

An At-the-Money option has a strike whether Call or Put which is equal to or near equal to the present price of the underlying.An at-the-money option is a call or put option that has a strike price that is equal to the market price of the underlying asset. Like OTM options, ATM options possess no intrinsic value and contain only time value which is greatly influenced by the volatility of the underlying security and the passage of time.
 
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trump

Well-Known Member
#4
Intrinsic value and time value are two of the primary determinants of an option's price. Intrinsic value can be defined as the amount by which the strike price of an option is in-the-money. It is actually the portion of an option's price that is not lost due to the passage of time. The following equations will allow you to calculate the intrinsic value of call and put options:

Call Options: Intrinsic value = Underlying Stock's Current Price - Call Strike Price
Time Value = Call Premium - Intrinsic Value
Put Options: Intrinsic value = Put Strike Price - Underlying Stock's Current Price
Time Value = Put Premium - Intrinsic Value

ATM and OTM options don't have an intrinsic component because they do not have any real value. You are simply buying time value which decreases as an option approaches expiration. The intrinsic value of an option is not dependent on the time left until expiration. It is simply an option's minimum value; it tells you the minimum amount an option is worth. Time value is the amount by which the price of an option exceeds its intrinsic value. It is also referred to as extrinsic value and decays over time. In other words, the time value of an option is directly related to how much time an option has until expiration. The more time an option has until expiration, the greater the option's chance of ending up in-the-money. Time value has a snowball effect. If you have ever bought options, you may have noticed that at a certain point close to expiration, the price seems to stop moving anywhere. That's because the time component of price decays exponentially; the closer you get to expiration the more a move in the security is needed to impact price. On expiration day, all an option is worth is its intrinsic value. It's either in-the-money, or it isn't.
 

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