Wednesday, February 11, 2009

Intrinsic Value

is the difference of the stock price and the strike price. Intrinsic value is the option's "in the money".. ITM portion of the option. If the stock opton is in the money.. the investor can sell or exercise the option for profit.

Call Option Intrinsic Value = Underlying Stock Current Price  minus the  Call Strike Price.

Put Option Intrinsic Value = Put Strike Price  minus the Underlying Stock Current Price.

So follow me using the strike price graph above:

Call Option: If the Underlying Stock Price is $100 and the Call Strike Price is $95 then the intrinsic value is $5.00.

Put Option: If the Put Strike Price is $105 and the Underlying Stock Price is $100 then the intrinsic value is $5.00.

Also, you see in the graph as the stock moves above or below within the context of the call or put option... the intrinsic value rises.... $5... $10, etc. Remember.. this is when you sell or exercise your option that is ITM.

Any option that is "OTM"... or Out of the Money has no intrinsic value... it would expire worthless.

Wooo! that's a lot of words!

Strike Price Graph

This is a graphic of an option's Strike Price graph. As you can see the middle price of $100 is the stock price. "ATM" is "At The Money". This means the option purchased by an investor to be bought or sold has a strike price that equals the stock price. An option that is ITM has "intrinsic value". "ITM" means "In The Money". A call option is ITM when the Exercise Price is below the current Stock Price. A put option is ITM when the Exercise Price is above the current Stock Price. "OTM" means "Out of the Money", a call option is OTM when the Strike Price is higher than the current stock price. A put option is OTM when the Strike Price is lower than the current stock price.

Thursday, February 5, 2009

Black Scholes Model

is a theory used to determine option pricing. This model combines stock price, strike price, and time value of the option. The Black Scholes model is the most used used theory in option pricing.

Tuesday, February 3, 2009

Option Pricing Theory

Any model- or theory-based approach for calculating the fair value of an option. The most commonly used models today are the Black-Scholes model and the binomial model....

Thursday, January 29, 2009

Option Pricing

is a terminology used to describe a series of terms that determine the value of an option. In the next couple of posts I will give you those terms and why they are important to option pricing.

Wednesday, January 28, 2009

Exercise Price

the price at which the underlying security can be purchased (call option) or sold (put option). the exercise price is determined at the time the option contract is formed....