Stocks & Commodities V. 29:11 (33): Explore Your Options by Tom Gentile

Stocks & Commodities V. 29:11 (33): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile

INTRINSICALLY BETTER?

Which is considered better to own, intrinsic or extrinsic premium?

Thatís a broad question with no absolute answer, though some may suggest that traders refrain from owning extrinsic premium. As option traders, we should recognize that all extrinsic or time value eventually drops to zero. At expiration, all thatís left is real intrinsic value or the option has no worth whatsoever.

More important, having contract value left in the form of intrinsic premium at expiration isnít the same as making a guaranteed profit. The reality is, you can buy 100% intrinsic value of, say, $5.00 in a deep call or put contract and end up with intrinsic value of $1.00 at expiration, or maybe nothing at all if the contract goes completely out-of-the money.




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