Fluctuations in option prices can be explained by intrinsic value and extrinsic value, which is also known as time value. An option's premium is the combination of its intrinsic value and time value.
Intrinsic value (內在值)and extrinsic value (時間值)
“At the Money" (ATM 現格期權)
- Current market price
"In the Money" (ITM 價內期權)
- A call option is in the money (ITM) if the market price is above the strike price.
- A put option is in the money if the market price is below the strike price.
- In-the-money options contracts have higher premiums than other options that are not ITM.
“Out of the Money" (OTM 價外期權)
- Option OTM, meaning an option has no intrinsic value, only extrinsic value(時間值).
- A call option is OTM if the underlying price is trading below the strike price of the call.
- A put option is OTM if the underlying's price is above the put's strike price.
OTM options are less expensive than ITM or ATM options. This is because ITM options have intrinsic value, and ATM options are very close to having intrinsic value.
Implied Volatility (IV 隱含波動率)
- IV is the market's forecast of a likely movement in a security's price.
- IV is often used to price options contracts: High implied volatility results in options with higher premiums and vice versa.
- Supply and demand and time value are major determining factors for calculating implied volatility.
- Implied volatility usually increases in bearish markets and decreases when the market is bullish.
Pros and Cons of Using Implied Volatility
Pros
- Quantifies market sentiment, uncertainty
- Helps set options prices
- Determines trading strategy
Cons
- Based solely on prices, not fundamentals
- Sensitive to unexpected factors, news events
- Predicts movement, but not direction
Source: Investopedia
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