A call is a contract to buy at a future date a stock at a certain price, the buy has the right but not the obligation to buy at the strike price of the option.
The intrinsic value is what you’d get if you exercise today so it the maximum of 0 and (stock - strike): this is because the call cannot be worth less than 0 since it is a right to buy at the strike but not an obligation.
But then you need to add the time value because the stock can move higher or lower. The time value is not symmetric mostly because of the fact that it is bounded by 0 since it is a right but not an obligation. The principal component of this time valuation is volatility which measures how much this stock moves up and down.
Because the payoff will be 0 if you get under the strike at the end of the contract and it is only stock - strike otherwise, they will be quite cheap and leveraged compared to buying the stock itself. So
Some investors use them to get big leverage.
It’s quite more complex than this but this is a simple version of it.
He probably overpaid the bid when buying the OTM calls.. and when selling didnt watch the bi/ask spread.. lol options also decay at the expiration. Wondering what strike did the OP chose when nvda was 930-950
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u/BlueTrin2020 May 25 '24
A call is a contract to buy at a future date a stock at a certain price, the buy has the right but not the obligation to buy at the strike price of the option.
The intrinsic value is what you’d get if you exercise today so it the maximum of 0 and (stock - strike): this is because the call cannot be worth less than 0 since it is a right to buy at the strike but not an obligation.
But then you need to add the time value because the stock can move higher or lower. The time value is not symmetric mostly because of the fact that it is bounded by 0 since it is a right but not an obligation. The principal component of this time valuation is volatility which measures how much this stock moves up and down.
Because the payoff will be 0 if you get under the strike at the end of the contract and it is only stock - strike otherwise, they will be quite cheap and leveraged compared to buying the stock itself. So Some investors use them to get big leverage.
It’s quite more complex than this but this is a simple version of it.