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Does a story about Option Selling and Option Pricing interest you? I know some of you will say no, but to ones who are businessmen or traders in options trading will find it important. That's why some of you may concern. I have a reason to continue my work. Yes, since it's needed, I'm going to talk about the Premium Collection Program, Time Means Money. By using options pricing models and theories, the program can help collect option premiums . LaSalle Futures Group has brought this informative site on Options and Futures to the world so that traders can learn all the dynamics on Options Pricing and Option Models for their success in the future. Talking about Option Pricing, we can get to know how option premium is determined. Look at the formula:
Intrinsic value + Time value = Premium
It's intrinsic value and time value making premium. So, what are they?
-
Intrinsic value: is the amount of money that could be currently realized by exercising an option with a given strike price. An option’s intrinsic value is determined by the relationship of the option strike price to the underlying futures price as below:
Puts: Strike price > Underlying futures price
Calls: Strike price < Underlying futures price
A call option has intrinsic value when its strike price is below the futures price, and vice versa to a put option. To sum up, an option has intrinsic value if it is currently profitable to exercise the option.
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Time Value: from the above formula, you have this:
Total premium
- Intrinsic Value
= Time value
See? If an option does not have intrinsic value (either it’s at-the-money or out-of-the-money), that option’s premium would be all time value. It isn't easy to understand the factors that affect time value although the mathematics of calculating time value shows that we can know time value when we know the total premium and the intrinsic value.
Actually it's hard. We cannot clear understand or make clear in these limited words. Time Means Money is there available to help you guys share knowledge about option selling and option pricing.
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