Been trying to wrap my head around intrinsic and extrinsic value in options trading. I get the basics, but I’m still confused about how they actually impact pricing.
Anyone care to break it down in simple terms? Especially interested in how these values shift as expiration approaches.
Intrinsic: in-the-money amount.
Extrinsic: time value + volatility.
Pricing factors:
• Underlying price
• Strike price
• Time to expiry
• Volatility
Extrinsic decays faster near expiration.
Intrinsic is immediate profit. Extrinsic covers time decay. Expiry nears, extrinsic drops fast.
Intrinsic and extrinsic value are crucial in options trading. Intrinsic is what you’d pocket if exercised now. Extrinsic covers time value and volatility.
As expiration approaches, extrinsic value drops off fast, especially in the last month. This can catch new traders off guard. I’ve seen plenty blow up accounts not understanding this concept.
One tip: focus on options with more intrinsic value if you’re holding longer term. They’re less affected by time decay. For short-term trades, pay close attention to theta. It’ll give you a good idea of how much value you’re losing each day.
Remember, options pricing isn’t just about whether you’re right or wrong on direction. Timing matters just as much.
Good question about intrinsic and extrinsic value. They’re key for option pricing.
Intrinsic is the actual value if exercised now. Extrinsic covers potential and time left.
As expiration gets closer, extrinsic value drops off quicker. Learned that the hard way on some SPY puts last month.
Always factor in both when looking at option prices.
Intrinsic and extrinsic value hit me hard when I first started trading options.
Lost a chunk on some Netflix calls because I didn’t grasp time decay. Extrinsic value melted away faster than I expected.
Now I pay close attention to theta, especially in the last month before expiration. Saved me from a bad trade on Amazon just last week.