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Without getting too complex about how they are derived, every options trader does need a basic understanding of the two options pricing components that make up the pricing or valuation of an option. You do not need to know the detailed models such as Black-Scholes etc.
An option is said to have intrinsic value if the option is in-the-money ITM. Intrinsic value reflects the amount, if any, by which an option is In-the-money ITM. In fact, an option may not have any intrinsic value at all. The remainder of the option price is time value. The remainder is time value. Time Value is the amount of money you pay for the length of time until the option expires. The further away from the strike date that you buy or sell the option, the more you pay for that option.
As you get closer to expiration, the value of the option decreases more and more rapidly, until it is at zero on the strike date. Time value increases as volatility increases, because if the stock is more volatile, it has a greater chance of moving into desired prices during the time period; it is therefore more valuable; it is also more risky.
This is why Swing Trading is so important. Because you are planning to hold the option either a call or a put for two to 10 days, you can minimise the effect of time value.
On this page you will learn about the two most important options pricing components, Intrinsic Value and Time Value. Of the two, the component of Time Value is the critical function that can make or break an options trader. An outstanding Options Trading Course that I recommend. The follow up course is even better!
Options Pricing Components Without getting too complex about how they are derived, every options trader does need a basic understanding of the two options pricing components that make up the pricing or valuation of an option. The price of any option call or put has two components: Learn about Time Value in options trading.
Articles for Newbies What is Option Trading? Most Profitable Options Strategy. Selling Options Selling Options. Buying Options Buying Options. Volatility Trading Strategies Volatility Strategies. How to Trade a Straddle.
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