2. Basic Options Concepts
At the money, out of the money, in the money
At the money
At the money options are options where the strike price is equal to the underlying stock's price
In the money
Out of the money option is an option that would have no value were you to excercise the option
- An
out of the moneyput option means that the undelying strike price isbelowits current market price - An
out of the moneycall option means that the undelying strike price isaboveits current market price
Out of the money
An in the money is an option that presents a profit opportunity were you to excercise the option
- An
in the moneycall option means the undelying stike price isbelowits current market price - An
in the moneyput option means the undelying stike price isaboveits current market price
Intrinsic and Extrinsic values
Intrinsic Value
- The minimun market value of the options contract is called the
intrinsic value - Only ITM options have intrinsic value
The intrinsic value of a call
[Asset price] - [Strike price]
The intrinsic value of a put
[Strike price] - [Asset Price]
Extrinsic Value
Extrinsic value is any additional value for an option above the intrinsic value, made up of time until expiration, implied volatility and other factors, also called time value
At expiration, extrinsic value will be zero and the option will be woth its intrinsic value only
The extrinsic value of an option
[Current Option Premiun] - [Intrinsic Value]
The extrinsic value peaks at ATM strike prices
