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Understanding How Options Are Priced
An option's value is made up of its intrinsic value plus a time premium. The current value of your option trade depends on the price you paid, as well as the underlying stock price relative to the strike price of your option contract.
Two components of an option's price When you buy a call or put option contract, the price you pay is made up of two distinct components: Time premium, also known as time value Intrinsic value, or the current value of the option, also known as the gross value Image source: Getty Images. The time premium, or the option's time value, is the portion of the option's price that you pay for the uncertainty of the option's price until expiration.
- Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
- The Bottom Line Options are contracts that give option buyers the right to buy or sell a security at a predetermined price on or before a specified day.
- Understanding How Options Are Priced
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In other words, this is the amount you're paying for what the underlying stock could be worth in the future. The intrinsic, or gross, value of an option is the amount the option is in the money. In addition, the current value of an option trade is your net result if you were to exercise the contract today.
In other words, this is the current intrinsic value of the option, minus the price you paid for it. Since the option is out of the money, it has no intrinsic value. Your option is no longer in the money, so it has no intrinsic value.
Calculating the value of your options Here's options option value few more details on the difference between call and put options, as well as a calculator that can help you determine the value of yours. Note: Options option value value of the option in the calculator is the same as the intrinsic value concept I discussed earlier. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
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