Value of Options
In the options market, the perception of a contract's value depends on whether you're a buyer or a seller. Buyers usually want the option to be in-the-money, or have value, at expiration, while a writer hopes the option will be out-of-the-money and expire worthless.
*Note: This graphic refers to a call option.
A call option is in-the-money if the strike price is lower than the current market value of the underlying security, and out-of-the-money if the strike price is greater than the current market price. Conversely, a put option is in-the-money if the strike price is greater than the current market value of the underlying stock, and is out-of-the-money if it is lower than market value.
Intrinsic and time values also play important roles in determining an option's worth. Intrinsic value takes into account how much an option is in-the-money, while time value is the difference between the intrinsic value and the premium.
For example, if the current market price of NRQ stock is $20, a call option on that stock with an exercise price of $15 has an intrinsic value of $5 because it is in-the-money by $5. If the current premium on the option is $7, the time value is $2. If the strike price were $25, on the other hand, the option would be out-of-the-money and have no intrinsic value. It might or might not have time value, depending on the expiration date.
Options involve risk and are not suitable for all investors.Detailed information on our policies and the risks associated with options can be found in Scottrade's Options Application and Agreement, Brokerage Account Agreement, and Characteristics and Risks of Standardized Options (available at your local Scottrade branch office or from the Options Clearing Corporation at 1-888-OPTIONS or by visiting www.888options.com). All option accounts require prior approval by Scottrade. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.