- Criteria for Successful Investing
- Risk Profile Charts
- The Definition of an Option
- The Valuation of Options
- Intrinsic and Time Value for Calls
- Intrinsic and Time Value for Puts
- The Seven Factors that Influence an Option's Premium
- Risk Profile Charts for Call Options
- Risk Profile Charts for Put Options
- Memory Tips for Long and Short Calls and Puts
- Basic Risk Profiles Summary
- Notation Standard for the Examples
- Chapter 1 Major Learning Points
Intrinsic and Time Value for Calls
Example 1.2. Where there is intrinsic value
Call intrinsic value |
|
|
Call time value |
|
Stock price |
$56.00 |
|
Stock price |
$56.00 |
Call premium |
7.33 |
|
Call premium |
7.33 |
Strike price |
50 |
|
Strike price |
50 |
Time to expiration |
2 months |
|
Time to expiration |
2 months |
Intrinsic value |
56 – 50 = 6.00 |
|
Time value |
7.33 – 6.00 = 1.33 |
Notice how: (Intrinsic value + time value) = the option price
Formulas for intrinsic and time values for calls:
- Call intrinsic value = Stock price – strike price
- Call time value = Call premium – call intrinsic value
The minimum intrinsic value is zero.
Example 1.3. Where there is no intrinsic value
Call intrinsic value |
|
|
Call time value |
|
Stock price |
$48.00 |
|
Stock price |
$48.00 |
Call premium |
0.75 |
|
Call premium |
0.75 |
Strike price |
50 |
|
Strike price |
50 |
Time to expiration |
2 months |
|
Time to expiration |
2 months |
Intrinsic value |
48 – 50 = 0.00 |
|
Time value |
0.75 – 0.00 = 0.75 |