Option market trading time value
Option premium value contains option market trading time value different classifications, each option market trading time value its own unique attributes.
This last category is where all of the unpredictability resides, where volatility is going to be found, and where the mysteries of option value are in play. Once you understand how extrinsic value interacts option market trading time value intrinsic and time value of an option, you are better suited to select underlying stocks most suitable for your strategy, and to manage stock and option option market trading time value more effectively.
The intrinsic value of an option is option market trading time value to the number of points it is in the money. The time value is the portion of the premium associated with time remaining to expiration. Time value declines as expiration approaches, with little or no time value remaining at the time of expiration.
Extrinsic value is the portion of option premium that increases or decreases due to volatility and market risk, and which may offset changes in intrinsic value caused by movement of the underlying stock. The proximity of current price to the strike is essential in judging the relative value and volatility of an option. The time value of an option is entirely predictable. Time value premium declines at an accelerating rate, with most time decay occurring in the last one to two months before expiration.
This occurs on a predictable curve. Intrinsic value is also predictable and easily followed. It is worth one point for every point the option is in the money. The third type of premium, extrinsic value, increases or decreases when the underlying stock changes and when the distance between current value of stock and strike of the option get closer together.
As a symptom of volatility, extrinsic value may be greater for highly volatile underlying stock, and lower for less volatile stocks. Extrinsic value is the only classification of option premium that is unpredictable. There are two types, historic and implied. Historic volatility refers to stocks, mutual fund shares, and other equity accounts and the degree and rate of price changes. A stock with a broad trading range and a tendency for price to move rapidly up and down is highly volatile; making is option market trading time value predictable than a more stable, low-volatility stock.
As a rule, stocks with higher than average historic volatility also tend to have associated options with higher premium levels. As the price varies based on volatility, it is also a symptom of changing risk levels. This brings up the second type, known as the implied volatility of options. In studying option market trading time value cause and effect of option premium levels, it often occurs that expected movement in the underlying stock may be factored into option premium values before the move occurs.
As option market trading time value consequence, option premium value and specifically, extrinsic value at times is unresponsive to movement in the underlying stock, even when the option is in the money. The premium value may even move in a direction opposite that of the underlying.
Equally important, options with a long time to expiration, notably out-of-the-money contracts, tend to be very unresponsive to underlying price movement. Even when the strike is passed and the contract goes in the money, long-term option implied volatility is likely to change very little, because time value dominates the overall premium level.
As expiration nears and especially when strike and current value are closethe option premium becomes more responsible and intrinsic value is increasingly likely to track stock price movement.
It is a quantification of the rate and degree of price changes in extrinsic value, based on changes in the underlying stock. At times, options are going to be either under- or over-valued. The formula for strategically playing these conditions option market trading time value to sell over-valued options and to buy under-valued options. However, such trades have to be entered quickly because the variances in implied volatility value tend to change rapidly.
The more traders realizing these disparities, the more rapidly the disparity becomes absorbed in the option pricing level. Fortunately, you do not need a degree in statistics to calculate implied volatility levels. Many commercial brands can be purchased or are provided as part of subscription services.
A free version of calculator for implied volatility is provided by the Chicago Board Options Exchange www. While most analysis of implied volatility is applied as a test of immediate value of contracts, the opposite use also provides value.
You can use implied volatility as a defined level of extrinsic value to test volatility of a particular stock. Just as you want to be certain to avoid buying or selling calls when the pricing is wrong, you may also want to avoid buying stock in exceptionally high-volatility companies. By testing implied volatility, you will be able to identify whether extrinsic value is high or low at the moment.
Remember, both time value and intrinsic value are predictable and known in advance. The volatility or extrinsic value of options is where all of the variation occurs. Knowing when extrinsic value is too high or too low is a smart way to buy and sell options. It also helps you to pick the most suitable stocks, both for long-term investing and for options strategies.
Thomsett is author of over 70 books in the areas of real estate, stock market investment, and business management. He lives in Nashville, Tennessee and writes fulltime. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too.
The Connors Group, Inc.
A closer look at these seemingly simple questions will make it clear that an age-old philosophical problem lies at their heart. Classifying, creating types is not the product of the 20th century. This is what the present exhibition aims to reflect on.
His most characteristic genre is installation, but he also works in countless other media. Having had university education in mathematics and physics and autodidactic studies in astronomy, music and fine art, Varnais themes navigate along the fine line between the artistic and the quotidian; he prefers using scientific references in his works.
His art has been represented at a number of exhibitions in Hungary and option market trading time value his latest solo show took place in Maribor, Slovenia. Photographs, small sculptures, objects based on (pseudo-)geometric, figurative and textual elements.