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Options 101

Options Basic Terms & Concepts Summary

This is a summary of the very basic terms and concepts of options, including calls and puts, option premium, intrinsic value, time value, implied volatility, and the Greeks. You can follow the links in the article to get a more detailed explanation with examples. Definition and basic logic of options Option represents a right, but … Read more


Call, Put, Long, Short, Bull, Bear… Confused?

Terminology of option positions may be confusing Sometimes people have a long put position (they own puts) and they say they are short. They mean their exposure to the underlying stock’s price movement is similar to a short position in the stock (they expect to make a profit when the stock falls). But in fact … Read more


Time Value of Out of the Money Options

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 … Read more


Time Value of In The Money Put Options

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 … Read more


Time Value of In The Money Call Options

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 … Read more


Put Option Price, Intrinsic, and Time Value

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 … Read more


Call Option Price, Intrinsic, and Time Value

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 … Read more


5 Basic Characteristics of Every Option

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 … Read more


Time Value of Options

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 … Read more


Exercising Options and Expiration

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 … Read more



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