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Time value is, as above, the difference between option value and intrinsic value, i.e. Time Value = Option Value − Intrinsic Value. More specifically, TV reflects the probability that the option will gain in IV — become (more) profitable to exercise before it expires. [6] An important factor is the underlying instrument's volatility ...
The intrinsic value is the difference between the underlying spot price and the strike price, to the extent that this is in favor of the option holder. For a call option, the option is in-the-money if the underlying spot price is higher than the strike price; then the intrinsic value is the underlying price minus the strike price.
Upon exercise, a put option is valued at K-S if it is "in-the-money", otherwise its value is zero. Prior to exercise, an option has time value apart from its intrinsic value. The following factors reduce the time value of a put option: shortening of the time to expire, decrease in the volatility of the underlying, and increase of interest rates.
PV: Present value of money, also explained further on. i : Interest rate or the discount rate, which is a risk-free rate of return or an inflation rate. n : Number of compounding periods of ...
The options trader makes a profit of $200, or the $400 option value (100 shares * 1 contract * $4 value at expiration) minus the $200 premium paid for the call.
Options are both a misunderstood and dangerous tool for retail investors. You can quickly make a lot of money using options -- and you can lose a lot of money just as quickly. But with volatility ...
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