Options With and Without Money and Their Intrinsic Value

Options With and Without Money and Their Intrinsic Value

The price of the underlying asset, such as a stock, exchange-traded fund, or futures contract, determines how much an option contract is worth. The option can be profitable (ITM), unprofitable (OTM), or profitable (P) (ATM). Each of these circumstances has an impact on the inherent worth of the option.

The value of the option is also influenced by how much time is left before the option contract expires, which in turn impacts how much the buyer is willing to pay—the premium—for the option.

Main points

  • If the asset’s current price exceeds the predetermined price, the call option, or the right to purchase the asset at that price, is in the money.
  • If the value of the underlying asset is less than the predetermined price, the put option, or the right to sell the asset at that price, is in the money.
  • The alternatives become unprofitable or lacking in intrinsic value in the opposite circumstances.
  • Before purchasing options, traders must decide if an asset is likely to be in the money during the specified time frame.

In the black

An option contract has intrinsic value if it is in the money. A call option is in the money if the current value of the underlying asset is greater than the predetermined price, also referred to as a “strike price,” which provides the buyer the right but not the duty to buy the asset at that price on or before a specific day. By exercising their right under the option agreement, the buyer could purchase the underlying asset for less than its current market value. That implies that the call has intrinsic worth.

In contrast, a put option is ITM if the price of the underlying security is less than the striking price. A put option gives the buyer the opportunity to sell an asset at a certain price on or before a specific day. If the buyer chooses to exercise their option, they may sell the underlying asset for more money than it is currently worth. Since the put has inherent value, this entails

A call option is a bet that the price of the underlying asset will increase before or on a specific date (the “expiration date”), whereas a put option is a bet that the price of the underlying asset will decrease during that time period.

A call option is in the money (ITM) if the strike price is $5 and the underlying stock is currently trading at $6. The more ITM the option is and the higher its inherent value, the higher the price rises above $5.

When a put option’s strike price is $5 and the underlying stock is currently trading at $4, the option is in the money (ITM). The more ITM the option is and the higher its inherent value, the further below $5 the price drops.

The lower of the strike price or the value of the underlying asset less the other price is the intrinsic value of an option that is in-the-money (ITM). Consequently, there is a $1 intrinsic value for both the call and put options with a $5 strike price.

Without funds

An option contract lacks inherent value if it is out-of-the-money (OTM). If the current value of the underlying asset is less than the strike price, the call option is out-of-the-money (OTM). Because they would be spending more than the asset’s present worth, the buyer of the call option would not exercise their entitlement under the option contract to purchase the underlying asset.

In contrast, a put option is out-of-the-money (OTM) if the value of the underlying asset is higher right now than the strike price. Because they would get less than the asset’s present value, the buyer of the put option would not exercise their entitlement under the option contract to sell the underlying asset.

A call option is out-of-the-money (OTM) if the strike price is $5 and the underlying stock is currently trading at $4. The more OTM the option is, the more below $5 the price drops.

If a put option’s strike price is $5 and the underlying stock is currently trading at $6, the option is out-of-the-money (OTM). The more OTM the option is, the higher it is over $5.

These OTM put and call options have no intrinsic value because they cannot be exercised profitably.

At the Cash

An option is ATM if the strike price of the contract is the same as the value of the underlying asset. A call or put option is an ATM if the strike price is $5 and the underlying stock is now trading at $5. ATM put and call options have no intrinsic value because they cannot be exercised profitably.

Timely Value

Both the intrinsic and time values make up an option’s value. The more time value an option has, the longer it has before expiring. This is because the longer the time to expiration, the greater the likelihood that the option will eventually become ITM and acquire intrinsic value.

A potential option buyer must consider the temporal value of the option as well as the intrinsic value of the underlying asset when determining how much of a premium they are willing to pay. An option may be out-of-the-money (OTM), in which case it has no intrinsic value, but it still has time value until it expires. Due to the time value involved in how much time the underlying asset has to become even more ITM, if an ITM option has an intrinsic value of $10, the premium should be greater than $10.

Questions and Answers (FAQs)

If a call option expires in the money, what happens?

ITM call options won’t technically “expire” because they will almost certainly be exercised prior to expiration. The trader will either exercise the call and purchase the underlying shares at the strike price if it is in the money on the expiration day, or they will sell the call to another trader who wants to exercise it. A feature that automates this procedure at market close on the expiration date may be available through your brokerage; check to see if it has one.

Why do I lose money even though my call is in the money?

One aspect that affects an option’s price is whether or not it is in the money. If you bought a big premium for the call, then it might have to be deep in the money before your position becomes lucrative. Measurements like implied volatility, delta, and vega are used by options traders to better understand the factors that will affect their transactions.

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