Option Premium Example - A Simple Guide To Options Premium

Option Premium Example - A Simple Guide To Options Premium

To get the transcript, go to www.rockwelltrading.com/coffee-with-markus/a-simpl…

How Well Do You Know How Options Premiums Work?

0:00 Introduction
0:35 Call Option Premium Example
3:58 Put Option Premium Example
6:25 Time Value of Premium Example

Options Premium Example

In today’s video, we’re going to use SPCE for the example.
SPCE is trading at $16.65

Call Option Premium

If we were to purchase a call option at $18, this would give us the option to purchase the stock at $18 dollars anywhere between now and when the option expires.

But the strike price is at $16.65. So purchasing the $18 call options would mean we’re actually overpaying for this option. So the $18 call option has no intrinsic value.

If we were to purchase a $15 call option, and the strike price was $16.65, the $15 call option would have $1.65 in intrinsic value.

When we examine the option chain on SPCE we can observe that in order to purchase a $15 dollar call option, it would cost 3 dollars per share, or 300 dollars.

This costs $1.35 more than the value of the option, why? Because there are 15 days before option expiration and this means a lot of time for the price of the stock to increase.

The difference between the real value of $1.65 and the $3.00 for the price of the option is called time value.


Put Option Premium

When we look at the premium on put options, you’re going to see why I love selling option premium!

Selling put option premium means that we’re able to sell put options and collect a premium.

If the stock is trading at $16.65 and we can sell it at $18.00, what is the real value? The value of that option would be $1.35. If the strike price is $16.65 and we sold a put option contract for $13.00 we would be losing money, there would be no value in this contract.

Time Value

On a linear timeline, the time value of premium decreases towards the DTE, or date of expiration. This means that if we sell a put contract, the value of that contract will diminish more rapidly as the date of expiration gets closer. Ultimately the goal is for this contract to expire worthless and you don’t have to buy it back.











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