Option underlying price definition
The market price of the option consists of two parts, intrinsic value and time value. Time value represents the benefit of having the choice of exercising or not for a period of time. In general the longer the time period, the higher the time value other things being equal. Both intrinsic and time value can be zero — when both are zero at the same time, the option is worthless. The market price or spot price of the underlying security is independent of the option. It is the price of Microsoft stock in the stock market in the example above.
It is determined by supply and demand for the Microsoft stock itself the underlying asset, not the option. Therefore, it influences the market price of the option. Remember that options are derivative securities and by definition the price of a derivative security is derived from the price of its underlying. If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong.
Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time. Home Calculators Tutorials About Contact. For example, you may own a call option on Microsoft stock with the strike price of 20 dollars. This is the characteristic of the option.
Whatever happens in the markets, the strike price of this option will always be Microsoft stock can go up to or down to zero, but the strike price of this option you have will always remain at 20 dollars. Strike price is fixed throughout the whole life of an option. If you exercise your Microsoft option, you will buy Microsoft stock for the strike price, i. Even when the stock would be trading at or at 15 or at 1 dollar, the price for which you buy when you exercise this option is 20 of course it does not make sense for you to exercise the option if the stock is at 15, as the option would be out of the money , and you better buy the stock in the stock market for 15 rather than for 20 using your option.
It is not fixed as a permanent characteristic of the option, but it is determined in the market by the interaction of supply and demand for the particular option in the same way as market prices for other securities are determined in other markets. The market price of the option is the price you pay when you buy the option and the price you get when you sell the option.
The market price of the option consists of two parts, intrinsic value and time value. Time value represents the benefit of having the choice of exercising or not for a period of time. In general the longer the time period, the higher the time value other things being equal. Both intrinsic and time value can be zero — when both are zero at the same time, the option is worthless. The market price or spot price of the underlying security is independent of the option.