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Option Prices

Options

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Option prices are printed in publications, though this is very little help for someone trading in real time. It’s far more useful for you to gain financial information from websites or digital price streams. These sources update rapidly, within seconds or minutes. If you’re trading based on printed sources showing yesterday’s price, you’ll be behind.

Options pricing is very different from share prices. You’re not concerned with the intrinsic value of a company. You’re concerned with the underlying asset’s market price in relation to the exercise price, also known as the strike price. A call is “in the money” if the market price is above the strike price plus premium, commissions, and fees. The market price for a put “is in the money” if it is below the strike price minus fees, premium, and commissions. The intrinsic value of an option is the amount the option itself is in the money. If the option isn’t in the money the intrinsic value is either very low, or non-existent.

Option prices are also affected by time. The greater the distance until the expiration date, the more time the option has to rise “in the money”. Its value decreases as it approaches the expiration date, especially if it is out the money as it gets closer. There is a measure which shows the loss per day of option value, called “Theta”.

Options can occasionally barely trade at all. This occurs due to illiquidity caused by low desire to buy, sell, or both. Option prices can be outdated due to low trade (but this happens less often in the digital trading world). Occasionally, this can even result in two options having the same price, but different exercise prices. In this case, the put with the higher exercise is worth more, and the call with the lower exercise is worth less. Some options do not trade on specific days, when they don’t trade their prices are not shown. They are replaced with empty space or occasionally ellipses.

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