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This chapter is from the book
Intrinsic and Time Value for Puts
Example 1.4 Where There is Intrinsic Value
Put Intrinsic Value |
Stock price |
$77.00 |
Put premium |
$5.58 |
Exercise Price |
$80 |
Time till expiration |
4 months |
|
Intrinsic Value |
$80 - $77.00 = $3.00 |
|
|
Put Time Value |
Stock price |
$77.00 |
Put premium |
$5.58 |
Exercise Price |
$80 |
Time till expiration |
4 months |
|
Time Value |
$5.58 - $3.00 = $2.58 |
|
Notice how: (Intrinsic Value + Time Value) = the option price |
Formulas for Intrinsic and Time Values for puts:
- Put Intrinsic Value = exercise price–stock price
- Put Time Value = put premium (or value)–put Intrinsic Value
The minimum Intrinsic Value is zero.
Example 1.5 Where There is no Intrinsic Value
Put Intrinsic Value |
Stock price |
$85.00 |
Put premium |
$1.67 |
Exercise Price |
$80 |
Time till expiration |
4 months |
Intrinsic Value |
$80 - $85.00 = $0.00 |
|
|
Put Time Value |
Stock price |
$85.00 |
Put premium |
$1.67 |
Exercise Price |
$80 |
Time till expiration |
4 months |
Time Value |
$1.67 - $0.00 = $1.67 |
|