OPTION PURPOSES 2

BUYER VS SELLER
Buyer owns something. Seller does not owns anything.
The Buyer will buy The Seller will sell
either a PUT or CALL. (BTO, STC) either a PUT or CALL. (STO, BTC)
Limited risk and unlimited gain Limited gain and unlimited risk
Buyer can only lose Seller can only gain
whatever they own. whatever they promise to sell.
STRIKE PRICE
Definition - The stated price per share for which underlying stock may be purchased
(for a call) or sold (for a put) by the option holder upon exercise of the option contract.
Example:
ABC company trading at – $20
Call Put
In The Money (ITM) 15 25
At The Money (ATM) 20 20
Out of The Money (OTM) 25 15
Rule of Thumb: ITM Call/Put is more expensive than OTM Call/PUT
The Option Premium is made up of;
• Intrinsic value
• Extrinsic value
Time value
Implied Volatility
Intrinsic value
Intrinsic value is the ITM portion of the option’s premium.
Extrinsic value
Extrinsic value is making up of the Time value that determine by theta and implied
volatility that determine by Vega.
Example:
ABC stock trading at $70
ABC strike 65 Call option is value at $8
Stock price – Strike price = Intrinsic value (70 – 65 = 5) ** Call option
Strike price – Stock price = Intrinsic value ** Put option
Option Premium – Intrinsic value = Extrinsic value (8 – 5 = 3)
let talk about these for now,please await for the next post