I have a simple question. If an fx option expires in the money, does it have any intrinsic value besides the value achieved from price moving above the strike price of a long call? I understand that theta eats away at the option value as time increases. The reason i ask, is that i am running the saxobank demo and they settle your option into a spot trade on expiry and then you can close the spot position or let it carry on, i am finding that i have more profits than i supposed to, that is i why i ask the question if there is any value left in the core option at end of expiry.
It's a dumb question... Once an option expires, there's no concept of intrinsic or time value. You have a spot position, period. The pnl on that position is whatever it is.
Yes, thats is true. My point is, when the option expires and rolls over into a spot position, is all the profit that is rolled over coming from the favourable movement above the strike price, or is it a combo of movement above the strike price + any value of the option before going above strike? Bottom, line what is that profit composed of?
i pay 350 points for the option, for 10days, after 10 days i get 150pts movement above my strike. Now, once rolled over, is my profit only the 150pts or do i get something from that 350 initial val of the option? My understsanding is that due to Theta that 350 intrinsic value goes to 0 on the 10th day and my only added value comes from the 150pt movement above my strike?
Think of it this way. An ITM option expiry is equivalent to a transaction where you sell the option for a price of 0, while buying/selling the underlying at the strike price. So all you have to do is think of what the pnl is on the set of three transactions: buying the option at X; selling the option at 0; buying/selling the underlying at strike K. Does that make sense?
Ok, i get that. I am just trying to clear up the doubt i am having. If i buy an ATM call, delta is usually at around 50%, therefore price is not moving 1 for 1, so my profit will be everything above the strike price also taking into account delta movement over the period. The net would be then subtracting the option cost. Therefore if i take the (close price - strike price = x) i can't just times that by $10 a point for a $100 000 contract, due to delta only being 50% at the beginning of contract.
Now you're confusing me... What does delta (and any other option concept) matter when the option is dead? I thought you're trying to calculate your pnl at expiry? If you're doing it at expiry, it's just the pnl on the underlying that you got as a result of expiry minus the price you paid for the option.