Call Option Basics: Intrinsic & Time Values Explained

In summary, the conversation revolved around understanding the basics of stock options, particularly in the context of buying an option for $20 with a strike price of $25 and a 3-month expiry date, while the underlying asset had a current price of $33. The questions raised were about the intrinsic value, time value, and overall option value, and who would benefit from each of these factors in the case of a call option. The individual also mentioned having searched for information on stock option basics on various websites.
  • #1
adnan jahan
96
0
Me want to know the exact basics. my example is
If i bought option of 20$ with strike price of 25$ for 3 months at the date of expiry underlying [beep] et is having price of 33$ what are
1) intrinsic value and to whom it will go to holder of option or writer.
2) what is time value to whom it will go holder or writer
3) what is the option value and to whom it belong writer or holder.
please explain those in call option .hopping that my question is complete .
 
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  • #2
Hi adnan! :wink:

Show us what you've tried, and where you're stuck, and then we'll know how to help! :smile:
 
  • #3
Last edited by a moderator:

1. What is a call option?

A call option is a financial contract that gives the buyer the right, but not the obligation, to buy a specific asset at a predetermined price (strike price) within a specified time period. The buyer pays a premium to the seller for this right.

2. What is intrinsic value in relation to call options?

Intrinsic value is the difference between the current price of the underlying asset and the strike price of the call option. It represents the amount of profit the holder would receive if they exercised the option immediately.

3. How is time value calculated for call options?

Time value is the difference between the total option price and the intrinsic value. It is affected by factors such as the time remaining until expiration, volatility of the underlying asset, and interest rates. Generally, the longer the time until expiration, the higher the time value.

4. Can you explain the concept of "in-the-money" and "out-of-the-money" call options?

A call option is considered in-the-money if the strike price is lower than the current market price of the underlying asset. In this case, the option has intrinsic value. On the other hand, an out-of-the-money call option has a strike price that is higher than the current market price, and therefore has no intrinsic value.

5. What are some potential risks and benefits of buying call options?

The main risk of buying call options is the possibility of losing the premium paid if the option expires out-of-the-money. However, the potential benefit is the opportunity to profit from the increase in the underlying asset's price. Additionally, call options offer leverage, meaning the buyer can control a larger amount of the underlying asset for a relatively small premium.

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