easiest way to think about this is from a market makers perspective. if you call a bank and buy OTC option to neutralize whatever exposure you might have ( currency, energy, rates etc. ), the market maker is going to quote you a price for the option that equals his or her expected loss. that is why you have to pay up for the option (if you are going long), because your position at execution is more valuable than the market makers. Therefore the price of the option at execution always equals the value of the option, ie, the market makes expected loss.
To clear up a few things before they snowball into confusion (and I don’t think all of this is in an LOS so don’t get wrapped up in it)
If I am not mistaken…
1) To me I would take the terms Price and Value to be the same… however
2) Value = intrinsic value + extrinsic value
–Intrinsic value = the “in-the-money” value of the option, how much the strike price is under (if a call) or over (if a put) the current price of the stock
–extrensic value = time value (with volatility included)
— Thus, as cinderella said, intrinsic value=price at expo because there is no more time value
Let’s say we have a call option for Strike Price 15 and underlying Spot is 20
Price of the option - The amount for which it is being traded let’s say is $8
Value of the Option - The return we will get if the option is exercised at that point in time (Intrinsic Value) = $5
So, price is $8 whereas, Value worth is $5. The rest $3 could be because of many reasons like Volatility, Time to Expiry, Market Sentiments etc.
Drawing further logic from above, we can say that
At Expiry Price = Value since only Intrinsic part if worth
There is one more observation
if the Spot reduced to 10, then intrinsic value of option will become Zero but the price could be $3 because of Time to Expiry, Volatility etc and traders might speculate that this option will expire In the money.
Let’s say we have a call option for Strike Price 15 and underlying Spot is 20
Price of the option - The amount for which it is being traded let’s say is $8
Value of the Option - The return we will get if the option is exercised at that point in time (Intrinsic Value) = $5
So, price is $8 whereas, Value worth is $5. The rest $3 could be because of many reasons like Volatility, Time to Expiry, Market Sentiments etc.
Drawing further logic from above, we can say that
At Expiry Price = Value since only Intrinsic part if worth
There is one more observation
if the Spot reduced to 10, then intrinsic value of option will become Zero but the price could be $3 because of Time to Expiry, Volatility etc and traders might speculate that this option will expire In the money.
Same.
Studying With
Value and price should be the same. Intrinsic value and price are only the same at expiration.
Studying With
hey guys,
easiest way to think about this is from a market makers perspective. if you call a bank and buy OTC option to neutralize whatever exposure you might have ( currency, energy, rates etc. ), the market maker is going to quote you a price for the option that equals his or her expected loss. that is why you have to pay up for the option (if you are going long), because your position at execution is more valuable than the market makers. Therefore the price of the option at execution always equals the value of the option, ie, the market makes expected loss.
cheers, carthurj
Studying With
Lets add to the confusion…
Value = Intrinsic value
Price = Premium
Studying With
To clear up a few things before they snowball into confusion (and I don’t think all of this is in an LOS so don’t get wrapped up in it)
If I am not mistaken…
1) To me I would take the terms Price and Value to be the same… however
2) Value = intrinsic value + extrinsic value
–Intrinsic value = the “in-the-money” value of the option, how much the strike price is under (if a call) or over (if a put) the current price of the stock
–extrensic value = time value (with volatility included)
— Thus, as cinderella said, intrinsic value=price at expo because there is no more time value
3) Another term for Price is Premium
Studying With
According to my understanding
Price = Intrinsic Value + Extrinsic Value
Let’s say we have a call option for Strike Price 15 and underlying Spot is 20
Price of the option - The amount for which it is being traded let’s say is $8
Value of the Option - The return we will get if the option is exercised at that point in time (Intrinsic Value) = $5
So, price is $8 whereas, Value worth is $5. The rest $3 could be because of many reasons like Volatility, Time to Expiry, Market Sentiments etc.
Drawing further logic from above, we can say that
At Expiry Price = Value since only Intrinsic part if worth
There is one more observation
if the Spot reduced to 10, then intrinsic value of option will become Zero but the price could be $3 because of Time to Expiry, Volatility etc and traders might speculate that this option will expire In the money.
Cheers
Studying With
According to my understanding
Price = Intrinsic Value + Extrinsic Value
Let’s say we have a call option for Strike Price 15 and underlying Spot is 20
Price of the option - The amount for which it is being traded let’s say is $8
Value of the Option - The return we will get if the option is exercised at that point in time (Intrinsic Value) = $5
So, price is $8 whereas, Value worth is $5. The rest $3 could be because of many reasons like Volatility, Time to Expiry, Market Sentiments etc.
Drawing further logic from above, we can say that
At Expiry Price = Value since only Intrinsic part if worth
There is one more observation
if the Spot reduced to 10, then intrinsic value of option will become Zero but the price could be $3 because of Time to Expiry, Volatility etc and traders might speculate that this option will expire In the money.
Cheers