Options Trading Pro | The Difference of Intrinsic Value vs Extrinsic Value

Options Trading Pro | The Difference of Intrinsic Value vs Extrinsic Value
Options Trader Pro John Napolitano reviews a very important aspect when it comes to trading with options. Intrinsic Value and Extrinsic Value. They both play a vital part in options. Learning how to read them properly, just like the Greeks, is something that John Napolitano teaches to his student's day one.
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Probably a complicated question, but intrinsic value and options.
Can you give a quick update quick explainer on that? Yeah.
That's one
  📍 of the very first things we touch on in our class because
  📍 it's very important to know moneys. So
 in the money options have intrinsic value. So basically the strike prices is lower. For a call, it would be lower than the current price.
So what you're doing is when you're buying an option that's in the money,
  📍 you have a coupon that says,
  📍 Hey, I have the right to buy this at a cheaper price than where it's trading.
 That's an in the money option, right? So if something's trading at $200 and you have a one 90 strike call option, you know your intrinsic value is $10.
because, no, there's no such
  📍 thing as a free lunch, right? No one in their
 right mind is gonna trade that for less than $10, because that's what it's worth. You have the right to do something at one 90 that is trading at 200 right now. So that's all intrinsic value is. It's the absolute value of that coupon you're buying right now.
If you're buying something that's at the money, if you buy the $200 call option and it's trading at $200, your intrinsic
  📍 value is zero. So that
 option's not gonna trade at zero. There's still some idea where you have volatility and time in there. Those are the other components of the Greeks that go into option pricing.
So you might pay $2 and I don't know, you might pay 2 0 5 for an at the money option, right? So that $5 is extrinsic value. I like to call that the
  📍 smoke and mirrors .
 That's the, that's the volatility and time component. So every option has two components, intrinsic and extrinsic. Sometimes it's zero for intrinsic, but then there's always extrinsic until you reach expiration at the very moment, at the very moment of expiration when the option's about to go to heaven and die.
All is left is intrinsic value or zero our terminology here today. This is awesome. Yep.
In options trading, the intrinsic value and extrinsic value are two important concepts that help determine the price of an option.
Intrinsic value:
The intrinsic value of an option is the inherent value that an option has based on the difference between the current market price of the underlying asset and the strike price of the option. It is the amount by which the option is in-the-money.
For example, if the current market price of a stock is $100, and you hold a call option with a strike price of $90, the intrinsic value of the option would be $10, which is the difference between the current market price and the strike price. If the option is out-of-the-money, meaning the strike price is higher than the market price, then the intrinsic value would be zero.
Extrinsic value:
The extrinsic value of an option, also known as time value, is the additional value that an option has beyond its intrinsic value. It is the amount by which the option is priced above its intrinsic value and is influenced by factors such as time to expiration, volatility, interest rates, and supply and demand.
For example, a call option with a strike price of $90 may have an intrinsic value of $10, but if it expires in three months, it may have an extrinsic value of $5, which represents the additional time value of the option. If the option is highly volatile, the extrinsic value may be higher due to the potential for the underlying asset to move significantly before expiration.
Overall, understanding the intrinsic and extrinsic value of an option is important in determining its price and potential profitability in options trading.
John Napolitano: Options Trader
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