Volcube Option Mini-game : Intrinsic/extrinsic

Let’s look at the following example from an Intrinsic/extrinsic mini-game.

Call or put:            Call
Spot price:            457.98
Strike:                  453
Extrinsic value:      6.01
Option value:          ???

Here, we need to calculate the value of the 453 strike calls. The spot is trading at 457.98 and the extrinsic value is 6.01. We know that the option value is equal to the intrinsic value added to the extrinsic value.

Option value = Intrinsic value + Extrinsic value

Intrinsic value is equal to zero for out-of-the-money (and at-the-money) options and it is equal to the absolute difference between the spot and the strike for in-the-money options. This call is in-the-money, because its strike is below the current spot price. So for this call the intrinsic value = 457.98 – 453 = 4.98.

 

Answer : The option value = 6.01 + 4.98 = 10.99.

 

: Volcube : Options education technology

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