EXERCISE PRICE
The exercise price (also called the strike price)is the price at which the buyer of a call option can purchase the stock during the life of the option, or the buyer of the put option can sell during the life of the option.
Exercise price is that price at which the writer has to deliver the stock to the call option buyer and buy from the put buyer irrespective of the prevailing market price in case the latter decides to exercise the option.
EXPIRATION DATE
Expiration Date is the date on which the option contract expires, i.e. the last date on which options contract can be exercised.
Options usually have either a monthly and/or quarterly expiration cycle. The maturity period for an option does not normally exceed nine months.
PREMIUM
Premium is the price that the buyer of an option, whether call or put, pays to the writer of the option, for the rights conveyed by the option. The premium of the option is a function of variables, such as:
• Current stock price,
• Strike price,
• Time to expiration,
• Volatility of stock, and
• Interest rates.
The buyer pays the premium to the seller, which belongs to the seller whether the option is exercised, or not. If the owner of an option decided not to exercise the option, the option expires and becomes worthless. The premium becomes the profit of the option writer, while if the option is exercised; the premium gets adjusted against the loss that the writer incurs upon such exercise.
IN THE MONEY
A call option is In-the-Money if the prevailing stock price (of the underlying asset) is greater than the exercise price.
AT-THE-MONEY
In case the call’s market price is the same as its exercise price, it would bee called at-the-money or at-the-market. ¬
OUT-OF-THE-MONEY
Similarly, if the market price of the stock is less than the exercise price, it shall be called out-of-the-money.
These concepts are tabulated below, wherein S indicates the present value of the stock and E is the exercise price.
Condition Call Option Put Option
S > E In-the-Money Out-of-the-Money
S < E Out-of-the-Money In-the-Money
S = E At-the-Money At-the-Money
INTRINSIC VALUE
The premium or the price of an option is made up of two components, namely, intrinsic value and time value. Intrinsic value is termed as parity value.
For an option, the intrinsic value refers to the amount by which it is in money if it is in-the-money. Therefore, an option, which is out-of-the-money or at-the-money, has zero intrinsic value.
For a call option, which is in-the-money, then, the intrinsic value is the excess of stock price (S) over the exercise price (E), while it is zero if the option is other than in-the-money. Symbolically,
Intrinsic Value of a call option = max (0, S – E)
In case, of an in-the-money put option, however, the intrinsic value is the amount by which the exercise price exceeds the stock price, and zero otherwise. Thus,
Intrinsic Value of a put option = max (0, E - S)
The exercise price (also called the strike price)is the price at which the buyer of a call option can purchase the stock during the life of the option, or the buyer of the put option can sell during the life of the option.
Exercise price is that price at which the writer has to deliver the stock to the call option buyer and buy from the put buyer irrespective of the prevailing market price in case the latter decides to exercise the option.
EXPIRATION DATE
Expiration Date is the date on which the option contract expires, i.e. the last date on which options contract can be exercised.
Options usually have either a monthly and/or quarterly expiration cycle. The maturity period for an option does not normally exceed nine months.
PREMIUM
Premium is the price that the buyer of an option, whether call or put, pays to the writer of the option, for the rights conveyed by the option. The premium of the option is a function of variables, such as:
• Current stock price,
• Strike price,
• Time to expiration,
• Volatility of stock, and
• Interest rates.
The buyer pays the premium to the seller, which belongs to the seller whether the option is exercised, or not. If the owner of an option decided not to exercise the option, the option expires and becomes worthless. The premium becomes the profit of the option writer, while if the option is exercised; the premium gets adjusted against the loss that the writer incurs upon such exercise.
IN THE MONEY
A call option is In-the-Money if the prevailing stock price (of the underlying asset) is greater than the exercise price.
AT-THE-MONEY
In case the call’s market price is the same as its exercise price, it would bee called at-the-money or at-the-market. ¬
OUT-OF-THE-MONEY
Similarly, if the market price of the stock is less than the exercise price, it shall be called out-of-the-money.
These concepts are tabulated below, wherein S indicates the present value of the stock and E is the exercise price.
Condition Call Option Put Option
S > E In-the-Money Out-of-the-Money
S < E Out-of-the-Money In-the-Money
S = E At-the-Money At-the-Money
INTRINSIC VALUE
The premium or the price of an option is made up of two components, namely, intrinsic value and time value. Intrinsic value is termed as parity value.
For an option, the intrinsic value refers to the amount by which it is in money if it is in-the-money. Therefore, an option, which is out-of-the-money or at-the-money, has zero intrinsic value.
For a call option, which is in-the-money, then, the intrinsic value is the excess of stock price (S) over the exercise price (E), while it is zero if the option is other than in-the-money. Symbolically,
Intrinsic Value of a call option = max (0, S – E)
In case, of an in-the-money put option, however, the intrinsic value is the amount by which the exercise price exceeds the stock price, and zero otherwise. Thus,
Intrinsic Value of a put option = max (0, E - S)