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sir i am struggling to understand a sentence in my study text, which is:
“on the expiry date, the value of an option is equal to its intrinsic value”
here is the sentence trying to convey that on the expiry date, IV=strike-spot=premium?
You have not said which options you are referring to, although the principle is the same for all.
If they are share options and the option is a call option giving you the right to buy shares at the price of $2, then if the actual share price on the expiry date is $3 then the intrinsic value is 3 – 2 = $1 and that is what the option is worth.
If it were a put option giving the right to sell shares at $2, then if the actual share price on the expiry date is $1.50, then the value of the option on that date is 2 – 1.50 = $0.50
(However none of that is really relevant in the exam)
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