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Strategies & Market Trends : Options-Technical analysis
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To: browser who wrote (32)10/13/1998 6:45:00 PM
From: Caroline  Read Replies (2) of 296
 
if only 6 wks remaining how come time value so high?

Time value is based on six different factors, only one of which is "time."

so how do you calculate how much the stock has to rise in order to breakeven since you have so much intrinsic value?

Let's take an in the money call.

Stock is $50, strike is $55, bid x ask 8.50 x 9.00.

The intrinsic value is $5
The market wants $9
The difference between ask and market is $4, that's time value.


ps: is there a formula on how to calculate time value so you can tell
how much the option is actually worth before you buy since time
value
decreases as the days of the option get shorter?


Calculating time value and calculating how much an option is worth are actually two different things.

Our stock at $50, strike @ $55, ask price on call at $9 has a "worth" of $9 -- $5 is intrinsic, $4 is "time."

This is actually an extraordinarily complicated subject, and I'm simplifying it greatly. Much of it is way over my head.

Suggest you play here:

numa.com

Stock: 50
Strike: 55
Dividend: 2.6
Interest rate: 4.5
Maturity: 2 months
click: implied volatility and enter: 9 in option price
click: call
click: calculate

Voila: implied volatility 134.02

Poke around the site, there's lots to learn.

CB
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