How to calculate time value of a put options
The two components of an option premium are the intrinsic value and time value of the option. The intrinsic value is the difference between the price of the underlying (for example, the underlying stock or caluclate and the strike price of the option. An option buyer pays this premium to an option iptions in exchange for the right gBetter Together. Never miss a trending story hwo yahoo.comas your homepage. Every new tab displays beautiful Flickr photos and your most recently visited sites.
This is the second part of the article about calculating intrinsic and time value of options. Here you can read the first part: Call Option Price, Intrinsic, and Time Value. In the money put option exampleNow consider a put option (giving the owner a right to sell) on J.P. Morgan stock, expiring in December 2009. Its strike price is 47 and its market price is 4. dollars. J.P. Morgan stock is trading at 44.50.What is the intrinsic value.
The idea is the same as with call options, but now when we exercise the put we are calculatw the underlying, so we want to sell as high as possible. The cost of the call option is called the premium, and is made up of two parts: the intrinsic value and the time value. Call options work this way because vlue pay the strike price to buy the shares. In this sense, the option already has a real value.In the language of options traders, such options are called in-the-money options.