ongoing option newb questions

Discussion in 'Options' started by TGpop, Jun 17, 2010.

  1. TGpop

    TGpop

    i'd probably end up clogging up this forum if i made a thread for all of my questions on options, so going to keep it compacted. i bought options volatility and pricing and read some of it today, there is one part i don't get: the intrinsic value is the amount that the option is in the money, but the time value is the other part , so time value is premium-intrinsic value. i don't get then how time value can be determined by supply and demand, surely it is simply the remainder, how can time value change without intrinsic value changing?

    Yep, i have a lot of work to do! aim of this thread is to gain a long term extensive knowledge of options, im certainly not here to teach!
     
  2. TGpop

    TGpop

    right, a deeper re-reading and i think i have figured out time value; time value may not even necessaily EXIST on the option, intrinsic value will always be there, but the ADDITIONAL ammount on top of the intrinsic amount, is the time value, if people demand more of the option, then obviosuly, time value rises and so the premium rises.

    zing!
     
  3. Small detail... intrinsic is only there if the option is ITM (in the money)

    Time premium changes for several reasons. The underlying moves, IV changes. Imminent dividends - tho I suppose that I may corrected and it's a volatility adjustment to compensate for the pending ex-div.

    But basically, you figured it out. :)
     
  4. TGpop

    TGpop

    another confusion!

    in chapter 2 of natenburg's book,first and second pages of, he shows examples. Im confused because it says that if a stock is at $99, and i buy an OTM call at strike $100 , for $2.70 premium. it then says that if price of underlying rises to 108, the intrinsic value of the option will rise by + 8 (understandable, it is now in the money by $8) , but it then says total profit will be 8-2.70=$5.30, i understand that intrinsic value rises, but where did the time value go? surely the time value would increase by something? how then can he say that profit will be 5.30, shouldnt it be more due to time value rising too?

    basicaly, where did time value go?!?
     
  5. curtains

    curtains

    without having the book on hand.
    I'd say he means you bought it, held until expiry (which means all time value has eroded).
    hence, the profit is intrinsic at exp - premium paid.
     
  6. TGpop

    TGpop

    time value erodes to zero by expiration?

    is this what people mean by 'time decay'? i don't understand though, how does the passing of time reduce demand for time value to zero? just since less time=less chance of profit?
     
  7. Yep, it's probably an expiration example at which time, there is no time premium. It's all intrinsic.
     
  8. MTE

    MTE

    Yes! Since there is no more time left at expiration there is no time value.

    Time value can be considered to be speculative value, or in other words, the chance that the stock would move in favor of the option holder.
     
  9. TGpop

    TGpop

    ok , things starting to become cleearer, just need to understand selling options now!
     
  10. TGpop

    TGpop

    starting to understand time value; with more time there is a greater chance an option will expire in the money, so sellers want more premium, and buyers will pay higher for a greater chance of success, whereas when time is nearly up theres less of a chance, so sellers like the low chance so dont mind selling cheap, and buyers don't want to pay much for something that doesnt have much time left so has a smaller chance
     
    #10     Jun 18, 2010