Call option put option strike price
This page explains call option strike price and the concept of intrinsic value. It will discuss examples of how intrinsic value changes as the price of underlying security goes up or down.
Options represent a right, but not obligation. There are two types of options, calls and puts. Call gives you the right to buy a stock, while put gives you the right to sell a stock. One question may come to your mind now. At what price can I buy or sell the stock? In fact, the price is determined by the option and it is one of the basic characteristics of every option.
It is called strike price or just strike. Different options may have different strike prices. Nevertheless, every option has just one strike price which is fixed during the whole life of the option. While you would need 20 dollars to buy the stock call option put option strike price the stock market, you can buy the same stock for just 15 if you have that option. This option definitely represents some value for its owner, as he would save 5 dollars by exercising it rather than buying the stock on the stock market.
Imagine that Microsoft announces that they have discovered a new product that will beat their competitors badly and generate billions in sales in the next year. What happens with the strike price of the option? It is fixed during the whole life of this option, regardless external conditions. Of course, the value that the option represents to its owner is now much greater than when the stock was at Now the owner of the option saves 13 dollars 28 less the strikecompared to 5 dollars previously.
Call option put option strike price intrinsic value of the call option increases, as the stock price increases. Imagine now that European Union suddenly decides that Microsoft has to pay a big fine for abusing its monopolistic position on the European market and threatens to call option put option strike price other restrictions on the company.
What happens to the option? The strike stays at 15, as call option put option strike price is fixed. The intrinsic value goes down to 17 less 15, or 2 dollars. When stock price falls, intrinsic value binary option best signal binary trading options and cryptocurrency trading options a call option goes down too.
Imagine now that things get even worse for Microsoft. There comes a financial crisis, some big call option put option strike price go bankrupt, the world economy is expected to slow down, and so is the demand for Microsoft software products. What about the option? Strike stays at How much is the intrinsic value now?
You can buy the stock for 12 on the stock market. If you exercise the optionyou would pay 15 for the same stock. Would you do it? Of course not, you better throw that option away, as exercising it would cause you a loss of 3 dollars. The beauty of options is that you have the choice. When you see that exercising the option would actually be worse than simply buying the stock on the stock market, you just buy the stock on the stock market.
Therefore, the intrinsic value of an option can never be negative. In all the examples in this article, we have been dealing with call options. The logic behind the intrinsic value of put options is the same, only the relationship to the stock price is inverse, as call option put option strike price represent the right to sell.
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