Been reading about options and see intrinsic and extrinsic value mentioned often. I am confused about which one matters more when trading.
I’ve looked into both but struggle to grasp the real advantages and disadvantages of each. Made some bad calls lately and wonder if this is part of my issue.
What are the key pros and cons of each approach?
Intrinsic value = profit if exercised now. Extrinsic = time and volatility premium. Intrinsic pros: • Guaranteed value • Less time decay risk. Extrinsic pros: • Higher potential returns • More leverage. Focus on total option price movement.
Options have intrinsic and extrinsic value, but knowing how they work is crucial for trading. High intrinsic value options are safer as they are closer to the underlying stock price, ensuring some profit potential. However, options focused solely on extrinsic value can offer high returns with the risk of losing daily due to time decay. My strategy is to prioritize options with some intrinsic value for steady movements. I only consider high extrinsic options when I anticipate quick price changes. Many traders mistakenly hold onto extrinsic options too long, which leads to losses.
Deep ITM options work well for steady gains in my experience.
Both have their place but understanding when to use each makes the difference. Options with mostly intrinsic value move more predictably with the underlying stock but offer less leverage.
Extrinsic heavy options can multiply your money fast but theta decay works against you every day. The key is matching your choice to your timeframe.
For longer holds, intrinsic value protects you. For quick moves within a few days, extrinsic can work if you exit fast.
Time decay killed me on my first options trades because I only bought out-of-the-money calls chasing that extrinsic value.
Now I balance both. In-the-money options give me that intrinsic safety net, while some extrinsic value still offers upside potential.
Lost $800 learning this lesson the hard way on Apple calls that expired worthless.