Lesson 3 of 6 · Options 101
Premium & intrinsic value
Premium has two parts.
Premium is the total price of an option. Intrinsic value is how far in the money the option already is. Extrinsic value covers everything else: time remaining and the expected move. OTM options are 100% extrinsic.
Where the numbers land.
A call with strike 100 costs $3.00 per share, or $300 per contract. BREAKEVEN is 103: the stock must close above that at expiry for you to profit. Below 103 you lose part or all of the MAX LOSS of $300.
This one is an animated diagram in the app. See it in Vero.
Extrinsic value disappears at expiration.
A stock is at $103. A $100 call costs $3.50. Intrinsic: $3.00 ($103 minus $100). Extrinsic: $0.50. At expiration, if the stock is still at $103, the option is worth exactly $3.00. That $0.50 vanished. Buyers pay that decay. Sellers collect it.
You own a $100 call. The stock expires at $99. What happens to the option?
Show the answer
B. It expires worthless. A call needs the stock above the strike at expiration to have any value. At $99, the $100 call is out of the money and expires worth nothing.