INTRINSIC VALUE + TIME VALUE = OPTION PRICE
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Here two concepts should be explained: in-the-money and
out-of-the-money. A call option is in-the-money when the strike
price, the price at which you can buy the stock, is lower than the
current market price. Out-of-the-money is, of course, the opposite;
the strike price is higher than the current market price.
The option will probably be cheaper to buy when it is out-ofthe-
money, but buying the option, you are hoping that time will
cure this and bring you in-the-money before your time (the option)
is up.
An experienced player, whether he is a buyer or a writer (the
seller of the option, the role of the casino owner), will spend
most of his time with out-of-the-money options—options that
only have time value.
To summarize, the option price is determined by adding intrinsic
value to time value. Intrinsic value is the real value of the option. The time value is the value that you place on the possibility
that the option will attain some intrinsic value by having the
stock price move through the strike price and into-the-money.
Here two concepts should be explained: in-the-money and
out-of-the-money. A call option is in-the-money when the strike
price, the price at which you can buy the stock, is lower than the
current market price. Out-of-the-money is, of course, the opposite;
the strike price is higher than the current market price.
The option will probably be cheaper to buy when it is out-ofthe-
money, but buying the option, you are hoping that time will
cure this and bring you in-the-money before your time (the option)
is up.
An experienced player, whether he is a buyer or a writer (the
seller of the option, the role of the casino owner), will spend
most of his time with out-of-the-money options—options that
only have time value.
To summarize, the option price is determined by adding intrinsic
value to time value. Intrinsic value is the real value of the option. The time value is the value that you place on the possibility
that the option will attain some intrinsic value by having the
stock price move through the strike price and into-the-money.