Option price, also known as premium, option fee or bid-ask price, consists of two main parts: connotation value and time value.
l？ Option price = intrinsic value+time value.
What is intrinsic value?
Intrinsic value refers to the total profit that can be obtained when the contract is performed immediately. Specifically, it covers real options, virtual options and equivalent options.
The underlying price represents S, and the option exercise price represents X.
What is the value of time?
Time value refers to the part where the option price exceeds its intrinsic value.
As the time from the expiration date of the option increases, the time value will also increase. This is because in a long period of time, the price of options is more susceptible to the possibility of large fluctuations, which provides more profit opportunities for option buyers.
Take the real estate in our first article as an example, and consider the situation of Xiao Zhang and Xiao Ming.
If they agree to buy a house in a longer period of time in the future, the probability of house price fluctuation will increase, and option buyers will have to pay higher royalties for longer options. In this example, the higher option fee is designed to compensate the uncertainty of the seller's future house price fluctuation.
The relationship between time value and expiration time is non-linear, not a simple multiple relationship. As the expiration date of the option approaches, the time value gradually decreases and finally returns to zero on the expiration date.
Time value reflects the time risk and price fluctuation risk in the process of option trading. As the expiration date of the contract approaches, the time value of the option gradually weakens, and the option premium is zero when it finally expires.
Seeing this, most investors will think that option premium is only related to time value. Read the following article carefully.
The time value is mainly influenced by three factors: the actual fluctuation of the underlying asset price, the implied fluctuation rate and the remaining time.
1. Relationship between target price and execution price
The closer the target price is to the exercise price, the greater the time value; On the contrary, the farther the target price is from the exercise price, the smaller the time value. The time value near the flat option is the largest, and the time value of the deep imaginary and deep real options is smaller.
2. The influence of implied volatility
The increase of implied volatility will lead to the increase of time value, while the decrease of implied volatility will lead to the decrease of time value.
3. The influence of expiration time
The longer the term, the greater the time value; On the contrary, the shorter the term, the smaller the time value.
4. The principle of comprehensive effect of factors:
These three factors * * * lead to the uncertainty of whether the bulls can make profits when the options expire, which leads to the increase of time value.
For example, one month before the expiration, it is difficult to determine whether the flat option will be profitable; The real option has higher profit probability and higher profit certainty when it expires; When the virtual option expires, the profit probability is small and the profit uncertainty is relatively high.
Therefore, the time value of flat options is the largest. The increase of implied volatility will also increase the profit uncertainty when the option expires, while the long term will increase the profit uncertainty when the option expires.
5. The influence of three factors is influenced by time.
When the maturity period is longer, the actual fluctuation and implied fluctuation of the target price have more significant influence on the time value; When the maturity period is short, time has a great influence on the time value.
Therefore, sellers should not sell many time-valued options at will, hoping to make profits through the passage of time. Because the other two factors are also affecting the time value, they may increase the time value, thus adversely affecting the seller.