- This topic has 4 replies, 3 voices, and was last updated 6 years ago by
.
- Posts
1. In the option value, it says that for the intrinsic value, value of an option will be equal with its intrinsic value on the expiry date…. i dont quite understand this…… if i’m not wrong intrinsic value is the difference between share price and the exercise price.
IF value of an option is equal with its intrinsic value, that means exercise price will be 0 and when share price reaches 100 at the exercising date(just an assumption) leading intrinsic value to be 100 ????
2. in the ACCA website technical article for P4 title ‘investment appraisal and real options’ under the heading of european style options or american style options, 2nd paragraph last sentence it says that
‘ An option prior to expiry will have a time-value attached to it and this means that the value of an option prior to expiry will be greater than any intrinsic value the option may have, if it were exercised.’i do not understand this part… how do we know option prior to expiry date is always greater than intrinsic value ????
I don’t know why you say that the exercise price will be zero!
The intrinsic value is indeed the difference between the exercise price and the current share price. So….if it is a call option and the exercise price is 80 and the current share price is 90, then the intrinsic value is 10. Obviously the actual value of the option will be higher because of the time to expiry and is calculated using the Black Scholes formula.
The longer the time to expiry, the greater the chance that the share price will rise over the period and therefore the greater the value of the option.Have you watched my free lectures on option pricing?
but why would an option be equal to its intrinsic value on the expiry date ???
Sorry John, let me rephrase the question
1. but why would an option be equal to its intrinsic value on the expiry date ???
2. you have mentioned that time value will always be greater than intrinsic value, then can we say that option premium(this formula is stated in investopedia) = intrinsic value + time value ??
so all the options that we calculate is option premium ?Have you actually watched my free lectures on share options yet???
The option is the right to buy (or sell) a share at a fixed price on a future date. The value of the option is the amount you have to pay for it – the premium.
If you have the right to buy a share today at a price of $1.80, and the current share price is $2.00, then you would have to pay $0.20 for the option – this is the intrinsic value.
However, the point of buying an option is to be able to buy the share at a fixed price on a future date, and (using the same example) the share price will have changed by the future date – it is likely to increase. Therefore you would have to pay more than $0.20 for the option, because of the time value.
Writing about intrinsic values is of no real relevance in the exam, and quoting that formula from investopedia is completely irrelevant. If you are asked to value a share option (i.e. calculate the premium) then you will be expected to apply the Black Scholes formula that is given on the formula sheet. I explain all of this and work through examples using the formula in my free lectures. (You can only be expected to value share options. You cannot be asked to value currency options because the formula changes – the valuation of currency options appeared in the syllabus for a year but was then removed!).
Please watch the lectures – you cannot expect me to keep typing out what I explain in detail in my lectures.
- The topic ‘questions about option value’ is closed to new replies.