Intrinsic and extrinsic value in options trading
Retail traders commonly engage in options trading. In this practice, distinguishing between intrinsic and extrinsic value is a crucial aspect to comprehend. Understanding these two components can help traders better evaluate options contracts and develop effective trading strategies. This article will provide an overview of intrinsic vs. extrinsic value, explain how to calculate them, discuss strategies using intrinsic and extrinsic value, and provide tips for profiting from options trades using these concepts. What is intrinsic and extrinsic value? Every options contract has two components of value – intrinsic value and extrinsic value. Intrinsic value is the amount an option is in-the-money. For call options, it is the amount by which the strike price is below the current market price of the underlying asset. For put options, it is the amount by which the strike price is above the current market price. Intrinsic value represents the minimum value of an option. The amount c...