Lesson 2 of 8
How Options Are Priced
Intrinsic value, time value, and the Greeks
Intrinsic Value
How far in-the-money the option is
AAPL at $270, $260 call = $10 intrinsic
Can never be negative
Only ITM options have intrinsic value
Time Value
Time left until expiration
More time = more expensive
Decays faster as expiration approaches
This is what kills option buyers
Theta
Time decay
loses value daily
Delta
Price sensitivity
how much option moves per $1
IV
Implied volatility
expected future swings
the trap
Options lose value every single day from time decay (theta). You can be right about direction but still lose money if the move is too slow.
AAPL 3 months. A $5 move matters a lot more to an option expiring Friday than one expiring in 6 months.
Check yourself
What is theta in options trading?