# option price and value

What is option price and value?

See S2000magician post below.

Price is exercise price while value is "current price - exercise price " in case of call option or " exercise price - current price " in case of put option assuming you are exercising the options .

In CBOK there is very good article explaining difference between price and value.

Hope that helps

See S2000magician post below.

It’s now 7½ weeks since people took the Level I and Level II exams, and they seem to have forgotten everything.

Sigh.

The price of an option is what you pay for that option.

The value of an option is what you _ should _ pay for that option.

In this respect, options are no different from stocks, bonds, real estate, cars, bubble gum, and so on; the price of each of these assets is what you pay to get them, the value is what they’re really worth (i.e., what you should pay to get them).

The price is not the same as the strike (or exercise) price.

Neither the price nor the value has anything to do with what you paid (or received) for an option in the past.

Price is the cost to buy or sell, and is determined by the market. Value (usually what we mean is the concept of “Intrinsic” value) is our SUBJECTIVE assessment of what the asset is worth given some set of assumptions.

I do agree with the definition of S2000magician (price is what you pay for and value is what you should pay for) but how is it that the difference between price and value can be so huge then. For example, a forward contract can be priced 1000 and valued 20.

Thanks.

I think you are confusing the price of the underlying with the price of the forward there. Usually forwards are set with such prices of the underlying that the initial price of the forward contract is zero. As time goes by, the underlying price changes, so the value of the contract moves in either direction, in line with (or counter to, depending on your position) the underlying. So you can enter into a long wheat contract at a price 1000 in three months (current price is also 1000), the price of the forward contract at time t0 is 0. If wheat price goes up by 20 to 1020, then your forward contract suddenly has positive value of 20, as you can purchase wheat at a price lower than market one (you can purchase at 1000, while market price is 1020). Obviously, the example is simplified to make a point, valuation of forward contracts is more complex, and you will deal with it in L2.

The price of a forward contract _ is _ the price of the underlying, based on the spot price and risk-free rate at the inception of the forward contract, and the maturity of the forward contract. The initial price is not zero; but the initial value is zero.

Be careful not to mix up your terminology.