Read Premium as Intrinsic Plus Time
Distinguish intrinsic value, extrinsic value, and moneyness in a basic option quote.
Every premium is paying for a package of inputs. Intrinsic value Intrinsic value is the immediate exercise value. A call with a $45 strike when the stock is $50 has $5 of intrinsic value. A put with a $55 strike when the stock is $50 also has $5 of intrinsic value. Extrinsic value Extrinsic value is premium above intrinsic value. It reflects time, expected volatility, rates, dividends, and market demand. This is the part that can disappear even if your directional idea is partly right. Moneyness In-the-money, at-the-money, and out-of-the-money describe strike location. Moneyness affects delta, extrinsic value, breakeven, and…
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