Options: What are intrinsic value and time value? // Options extrinsic value, options price, Options trading basics tips 101 extrinsic value for beginners for dummies Options Greeks explained What is delta Options trading Greeks, what is options delta gamma, options trading for beginners, options trading tutorial, options trading tips, options trading strategies, options trading 101, options trading for dummies, options trading for income, options for beginners, options for dummies, options tutorial, options strategies, options strategies explained, options basics, options trading basics welcome to looking at the markets with
David Moadel I wanted to use this video
to explain the difference between
intrinsic value of an option and the
extrinsic or time value of an option
some people call it extrinsic value some
people call it time value it's the same
thing it's the opposite of the intrinsic
value and you really need to know these
things if you're going to trade options
so i'm going to use alibaba call options
as an example here to illustrate it and
these are expiring next week December
second 2016 and we're going to pretend
that right now
Alibaba is trading at 93 dollars a share
it'sit's actually 9301 but we're going
to pretend this is exactly 93 just for
illustrative purposes
ok so let's say you purchased or or
let's say you owned a ninety dollars
strike
alibaba call option alright expiring in
one week on December second 2016 ok
so this has and we're gonna pretend
again this is exactly 93 that that
Alibaba is currently trading at 93
dollars a share
alright well this would give you the
right but not the obligation the the
right to purchase a hundred shares of
Alibaba stock at ninety dollars okay and
that's pretty good considering that
that's quite a discount quite a bargain
considering that right now its trading
and at around $93 share because think
about it if you owned this call option
you could exercise your right to buy a
hundred shares of Alibaba at ninety
dollars a share and then you could sell
it right now you could turn turn it
around and sell it for 93 dollars a
share for a profit of three dollars per
per share
and so that's why the 90 strike call
right now has three dollars of intrinsic
value because that means that right now
you could sell if you owned this call
option you could sell all those stocks a
hundred shares for three dollar profit
right now so that's three dollars of
real value actual internal value or
intrinsic value of this this call option
ok so these call options right now we're
selling not for three dollars but for
three dollars and thirty-five cents
haha so there's an extra 35 cents there
three dollars worth of intrinsic value
but also 35 more cents worth of
extrinsic value or time value
ok so how do you get the intrinsic value
well first of all only in the money
options which means call options where
the strike price is less than the
current price only in only in the money
options have any intrinsic value at all
ok and you can you get that number by
taking the current stock price and
subtracting the strike price if it's a
call option
alright so how do you get the interest
of the extrinsic or time value you take
that intrinsic value which let's say is
three dollars here
okay so yeah you take the current price
of the option three dollars thirty-five
cents and you subtract the intrinsic
value and that's how you get the time or
extrinsic value which so that would be
three dollars thirty-five cents minus
three dollars that would be thirty-five
cents per share of extrinsic or time
value so what what is that extra 35
cents represent what it what are you
paying for you you can easily understand
why it would be three dollars okay
because you could turn that around and
make sell the shares and make a three
dollar profit if you owned the United
straight calls so wait why are you
paying a little bit more wealth at
thirty-five cents that's that's X
transit time value that's the value of
the the potential or the hope for the
possibility
that before expiration which is not for
another week
the the hope for the potential that
Alibaba stock might go up some more that
might go up
ok which would raise the value of your
call option
ok you might buy it 335 a share and if
Ali Baba stock went up might go up to
you know four dollars a share or form
four dollars fifty cents or five dollars
or even more so you're paying 35 cents a
share for the potential the possibility
the hope that within the next week
before for expiration or at expiration
that that the price of of both alibaba
stock and your call option will go up
now be aware that when expiration hits
all of the extrinsic value or time value
in a wrapper it evaporates they're gone
it's gone okay because think about it
upon expiration when this expires
there's no time value left because
there's no time left there's no
potential or possibility or hope that
Ali Baba stock will go up anymore
past the expiration date because here it
is it's here when that day comes when
that time comes when it expires
there's no more hope of it going up
anymore before expiration because extra
expiration is here
ok so
so that 35 cents worth of time value
will dwindle overtime until expiration
it's alright so let's look at an apt the
money call option
alright which would be 93 93 call
because right now it's we're going to
say it's trading at 93 exactly we're
gonna pretend all right and so at the
money options have no extrinsic or time
value at all
I'm i apologize i said the wrong thing
they have no intrinsic value at the
money options have no intrinsic value
ok because you could wait what are you
going to buy the 93 strike call and then
you know that that'll give you the right
to buy a hundred chairs at 93 ok and
then you got to turn around and sell it
for exactly $93 on the open market what
good would that do you
you would make no profit ok so it has no
intrinsic value so at the money options
are all
exter extrinsic value its all time value
it's only time value that's all it is
so these 93 strike at the money call
options is there a dollar twenty six per
share that's the price and that's all
time value
ok that's all hope and potential and
possibility that Alibaba stock might go
up and that your call options might go
up before expiration on December second
in this case
ok and out of the money call options
also have
no intrinsic value
ok there this is you know these 96
strike call options they're all
x.x translator time value because you
know what you gotta buy a the right to
sell them at 96 ok and then to buy them
sorry to buy the right to buy them at 96
and then exercise that and then sell
them on the open market for $93 for a
three dollar per share loss you would
never do that
so they have no intrinsic value but they
do have these have twenty-eight cents
worth of extrinsic or time value and
that's again you're paying for the hope
or the potential possibility that that
Alibaba might go up and therefore your
call option might go up
right so put options pretty much work
the same if you have an in the money put
option you know that this the these 90
street 96 strike put options have three
dollars worth of intrinsic value and I
got that by taking the the current i'm
sorry the strike price and subtracting
the current stock price for put options
of that will get you the intrinsic value
because if you owned the 96 strike put
that means that you could buy alibaba
493 dollars a share and would give you
the the put would give you the right to
sell them turn turn them around and sell
them for ninety six dollars a share
therefore giving you a three-dollar
per-share profit so you can see why
these have a three-dollar intrinsic
value because there were three three
dollars right now and the else they
added on twenty cents worth of X
transfer time value and that twenty
cents means you're paying twenty cents
per share for the hope or the
possibility or potential that Alibaba
stock might go down
before december second expiration ok and
therefore raise the price of your your
call sorry your put option right and at
the money put option would have no extra
that no sorry no intrinsic value because
you know why would you buy a hundred
shares of Alibaba stock at $93 and then
by the right to you know to sell to turn
around and sell but $93 share you that
would be no profit but the they do have
extra time value of a dollar 16 per
share worth that's what you'll be paying
for all that money would be just for
extra time value which you're paying for
the possibility of potential that
Alibaba stock might go down before
expiration and therefore your your put
option might go up in value and then
out-of-the-money put options have no
intrinsic value you know because why
would you buy the stock at 93 and then
sell it at 90 you know that that that
you would lose three dollars a share so
they have no end intrinsic value but
these do have 32 cents worth of extra
time value which again is the helper or
potential possibility that Alibaba stock
might go down
or in this case go down some more
because it already went down a little
bit on friday before december second
okay so i hope that is helpful i hope
that is a good example of what the
difference is between intrinsic value
which is what the you know with what
your option is really worth right now if
you were to you know it if if if it was
to expire right now what would it be
worth
okay how far in the money is it in other
words that's the intrinsic value how how
deeply in the money is your option and
only in the money options have intrinsic
value
and then whatever is left after the the
intrinsic value is taken out or
subtracted from the current option
options price that is the extrinsic her
time value and that's just you paying
for if you buy the option that's you
paying for the potential that the
that if it's a call option that that the
the stock might go up or or the
potential for the stock to go down if
you bought a put option
alright so if you like some more help
with stocks options trading or investing
or nes any aspect of Finance feel free
to send me an email anytime my email
address is David Modell @ gmail.com if
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thank you so much I really appreciate
you watching and listening to this video
and i'll talk to you soon
and