Options Premium

What makes up the price of an option? 

The price of an option is called the Option Premium. The Option Premium is made up of:
1. The Intrinsic Value (the “Fixed” component),  and
2. The Extrinsic Value (the “Variable” component)

 Intrinsic Value (IV)

An Option’s Intrinsic Value (IV) is the difference between:
1. The Current Stock Price (quantifiable) and
2. The Option Strike Price (quantifiable)

Intrinsic Value = Current Stock Price – Option Strike Price

As such, the Option Intrinsic Value is a Quantifiable value.

Example of Intrinsic Value

AAPL is trading at $99.97. We are interested to buy the AAPL July 90 Call. Calculate this option’s Intrinsic Value.
• Current Option Premium  = $18.45  (say)
• Current Stock Price          = $99.27
• Option Strike Price           = $90.00  (as we are interested in the 90 dollar Call)
• Option Intrinsic Value      = $  9.97  ($99.97 - $90)

Next: IV and Call Options ...