Back to: A Fast Course in Options

Evaluating Options

Option prices are a function of Time Value, Relation to Market, and Volatility.
Time Value: An option buyer essentially buys time. The more time he buys, the more he pays. Why? Because the longer the option runs, the greater the chance it will finish profitable, and the grater the risk for the writer.

• The longer the option has to run, the greater its value.
• Time decay: Option values tend to remain stable or only gradually decline until they near expiration, when the value drops very rapidly or "falls off a cliff."

Relation to Market: Option values rise or fall with the underlying market. The strike price is the price at which the option writer agrees to buy or sell. Options are valued by their intrinsic value, i.e., the amount by which a call's strike price is below the current market price of the underlying, or a put's strike price is above current market. Only "in the money" options have intrinsic value. Against the market options can be placed three ways:

• In the money: Call option strike price is presently below current market or put option strike is above current market.
• At the money: Call option or put option strike price is exactly the same as the market. No intrinsic value, time value only.
• Out of the money: Call option strike price is above current market or put option strike is below current market. No intrinsic value, time value only.
• Volatility: The volatility of the underlying stock or commodity also determines the option price. The more volatile the underlying, the more Risk the option writer incurs. The more volatile the market, the greater the demand for options, the higher premium writers can charge. You want to try to buy in periods of market calms when option premiums decline.
• Low volatility means cheap option premiums.
• High volatility means expensive options.

|| TABLE OF CONTENTS || Bull & Bear Newsletter Digest || Bull & Bear Reporter Featured Companies || Monetary Digest || Breaking News || Featured Newsletters || Featured Companies || Featured Services || || Classifieds/Advertisers || Links || Bull & Bear Archive || Search || E-Mail || || About Us || How to Subscribe ||How to Advertise || IR Programs ||

The Bull & Bear Financial Report Copyright 1999 | All Rights Reserved Reproduction in whole or part is strictly prohibited without prior written permision NOTE: The Bull & Bear Financial Report does not itself endorse or guarantee the accuracy or reliability of information, statements or opinionsexpressed by any individuals or organizations posted on this site PLEASE READ DISCLAIMER

Web Site Designed & Maintained by Estrada Design & Communications in association with THE BULL & BEAR INTERNET DIVISION 1-800-336-BULL