Call Options and Put Options that are in the money have Intrinsic Value. A Call option is in the money when the market is above the strike price. Thus an ABC Call Option with a strike price of 50 and the market price of ABC at 54 would have intrinsic value of 4 points. This is true whether the peron is Long (buyer) or Short (seller).
A Put Option is in the money with Intrinsic value when the market is below the strike price. If an XYZ 70 Put is trading and XYZ Stock is trading at 68, the option has 2 points of intrinsic value.
Options that are out of the money on either calls or puts have 0 Intrinsic Value. There is never negative intrinsic value. An option is either in the money or not.
Understanding how option contracts get their price (premium) can assist you in profitting in the market. Options are not priced 100% exact to the stock's share price.
That is because there are 2 different parts of an option contract. The 1st is the intrinsic value. This is the difference between the stock's actual share price and the option premium. So if we buy a $70 call on a stock that is trading at $78 the intrinsic value of the option is $8.
The option will be priced above its intrinsic value. The call option could carry a cost of $9.25 The other $1.15 is the time value of an option. Time value is the option premium price minus the intrinsic value.
This value is based on how many days are left before the option (time) expires. The other side of this is that as time goes on the lower the time value will go.
Copyright American Investment Training, Inc. Bond Option contracts and foreign currency options company.