What You'll Learn
Intrinsic Value
The immediate exercise value of an option
Time Value
The premium paid for the option's remaining time
Volatility Impact
How price swings affect option premiums
The Greeks Preview
Introduction to Delta, Theta, and more
Basic Pricing Formula
The fundamental equation that determines option value
Option Premium = Intrinsic Value + Time Value
Intrinsic Value
For Call Options:
Max(Stock Price - Strike Price, 0)
Time Value
Affected by:
- • Time to expiration
- • Volatility
- • Interest rates
Example: Pricing a Call Option
Stock Price
$52
Strike Price
$50
Option Premium
$3.50
Breakdown:
- Intrinsic Value: $52 - $50 = $2.00
- Time Value: $3.50 - $2.00 = $1.50
- Total Premium: $2.00 + $1.50 = $3.50