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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: edamo who wrote (2278)	2/5/2000 9:59:00 PM
From: Bridge Player	Read Replies (1) \| Respond to of 8096

Hi Edamo, In replying to a comment that Jill had made, I had originally said that if the price of the underlying (in the case of a call option) is less than the strike price of the option, then ALL of the option price is time premium, since there is no intrinsic value component in the price. That may be paraphrased, but that is what I THOUGHT I said. You said: << "time premium" is a minor, calculable component of an otm strike...the major, or variable component is "implied volatility".....if it was just "time" it would be no fun... the implied volatility is the component that gives rapid price changes in the premium in a fast moving or momentum issue. the idea of option trading is to capture any inflated implied volatility, which is yours to keep when a normalization of volatility occurs.>> From the CBOE website, glossary section: " Intrinsic value The amount by which an option is in-the-money (see above definition). ............ Premium The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract. ............ Time value The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value. " I agree with you that the implied volatility, as well as the amount of time until expiration, are the factors that determine the AMOUNT of time value of an otm option. However, I stand by my original statement that where an option is otm, ALL of the option price reflects only time value since there is no intrinsic value present. BP