How does an option start to exist?
Option is a derivative security and, said in the most general way, option is a contract. It is a contract between the buyer and the seller of the option.
Buyer agrees to pay a price to the seller (the market price of the option at the time of buying it) [...]
Three different prices
In order to fully understand the basic principles of options, you must be sure to know the differences between the three frequently used terms and key parameters for every option. All three are prices, but their meanings are very different. These three kinds of prices are:
Strike price of the option
Market price of the [...]
Moneyness of an option
Moneyness is a strange sounding term, but it is sometimes used for describing the amount of intrinsic value an option has. All options belong to one of the three basic groups (and they can move between these groups as the market price of the underlying changes, as you will see below). The [...]
Strike price and intrinsic value
On the examples with Microsoft stock, we have explored the strike price and intrinsic value of call options and put options. To sum up and make it look a bit more scientific, let’s look at the formulas for calculating intrinsic value for calls and puts.
Calculating intrinsic value of call options
Call intrinsic [...]
