This is the second part of the article about calculating intrinsic and time value of options. Here you can read the first part: Call Option Price, Intrinsic, and Time Value.
In the money put option example
Now consider a put option (giving the owner a right to sell) on J.P. Morgan stock, expiring in December 2009. Its [...]
Calculating intrinsic and time value of options
This article might help you in case that you don’t fully understand the differences between an option’s market price, intrinsic value, and time value. It will show you how these three are related and how to easily calculate intrinsic and time value of an option, when you know the [...]
What defines every option
Let’s summarize the basic characteristics (or parameters) which define every option. They are:
Underlying asset
Call vs. put
Strike price
Expiration date
American vs. European
Underlying asset
Option is a derivative security, a contract giving the owner (buyer) of the option the right (but not the obligation) to buy or sell a defined quantity of a defined asset. This [...]
Two options with different time to expiration
Consider two options with the following characteristics:
Both options are American
Both options are calls
The underlying of both options is Microsoft stock
The strike price of both options is 40
The only difference between the two options is the expiration date. The first call option expires in one month and the second call [...]
Read more: Time Value of Options
