Valuing Options
As we said before, options themselves have a value. Remember that options are totally separate entities to the underlying assets from which they are derived (hence the term
derivative). But in themselves they do have a value, which can be split into two parts:
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Intrinsic value; and
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Time value
In general:
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Intrinsic value is that part of the option's value which is in the money (ITM).
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Time value is the remainder of the option's value. out of the money (OTM) options will have no intrinsic value, and their price will
solely be based on time value. Time value is another way of say hope value. This hope is based on the amount of time left to expiration and the price of the underlying asset,
the hope being the possibility of additional (profitable) price movement in the underlying security.
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Time value is subject to time decay. Time decay increases exponentially in the last 30 days before expiration.
