Traders Toolbox: Learning Options Part 1 of 4 Revisited...

Trader's Toolbox

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Options Part 1 of 4

"There are four components to an options price: underlying contract price, intrinsic value ( determined by strike price), time value (time remaining until expiration) and volatility. (A fifth element, interest rates, also can affect option prices, but for our purposes is unimportant.)Intrinsic value refers to the amount an option is in-the-money. With Eurodollar futures at 95.55, a 95.00 call has an intrinsic value of .55. The more an option is in the money, the greater its intrinsic value. At-the-money and out-of-the-money options have no intrinsic value.

Options are referred to as “wasting” assets because their value decreases over time until it reaches zero at expiration, a process called time decay. Time value refers to the part of an option’s price that reflects the time left until expiration. The more distance an option’s expiration date, the greater the premium because of the uncertainty of projecting prices further into the future..."

Revisit the Trader's Toolbox Post: "Learning Options Part 1 of 4" here.