Time value of at the money vs. in the money options
In the last two articles we have explained why time value of at the money options is higher than time value of in the money options (it can be explained by the factors of risk and interest). We have not talked about out of the [...]
Call options
In the previous article we have explained why time value of at the money call options is higher than time value of deep in the money call options (other factors being equal). The reason is that the closer to at the money an option is, the more it limits your maximum risk from holding [...]
What does time value of options depend on?
While an option’s intrinsic value is easy to calculate just by looking at its strike price and the underlying’s market price, time value doesn’t have any simple and quick formula like this. There are more factors influencing time value of an option. Among the most important are time [...]
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 [...]
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 OptionsThree 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 [...]
Intrinsic value
In the article about strike price and intrinsic value of call options we learned that intrinsic value is the difference between the market price of the underlying stock and the option’s strike price. It moves together with the stock price, but can’t be negative. However, we only talked about calls.
Put options are different
With put [...]
