← BeginnerLesson 9 · 5:23
What are you actually paying for?
Summary
You can split any option price into intrinsic value, what you could collect right now, and time value, the part that is gone by the last day. You can say whether an option is in, at or out of the money. You can read time value as the gap between the blue curve for today and the black line for the last day.
Key terms
- intrinsic value
- The part of an option's price you could collect right now by using it.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- in the money
- An option that is worth something if used now: a call with the stock above the strike, or a put with the stock below it.
- at the money
- An option whose strike price equals the stock price, so all of its price is time value.
- out of the money
- An option that would get you nothing if used now, so all of its price is time value.
Check yourself
Answer each question to see why the right answer is right.
1. XYZ is at $105, and a call with a strike of $100 and 30 days left costs $6.60. How does that price split?
2. XYZ is at $95, and the call with a strike of $100 costs $1.43. Which is true?
3. XYZ is at $95, and a put with a strike of $100 costs $6.39. How does that price split?
4. On the graph, where is time value biggest?
5. You paid $6.60 for the $100 call with XYZ at $105. On the last day XYZ is still at $105. What is your result?
Finished the video and the quiz? .