Options Values: Premium, Intrinsic Value, and Time Value
Chapters in this video
- 0:00 The premium equation: intrinsic plus time
- 0:56 Carla's XYZ 50 call setup
- 1:57 Calculating intrinsic value on a call
- 2:32 Why intrinsic value can never be negative
- 3:31 Call up, put down moneyness logic
- 4:13 Time value and the melting ice cube
- 5:11 OTM premiums and expiration day traps
- 6:10 Rapid-fire exam recap
What this video covers
- The premium equation: premium equals intrinsic value plus time value, and what each piece actually represents
- How to calculate intrinsic value for a call (market price minus strike) and a put (strike minus market price)
- Why intrinsic value can never be negative, and what to do when the formula spits out a negative number
- The difference between in the money (ITM), at the money (ATM), and out of the money (OTM), and the call up, put down memory aid
- How time value is calculated as premium minus intrinsic value, and why an out-of-the-money option still has a premium
- Time decay (theta): why time value is highest at the money, erodes toward expiration, and hits zero on expiration day
- Common exam traps: negative intrinsic value answers, OTM premiums that are 100% time value, and what an option is worth at expiration
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