Why The Intrinsic Value Of Options Contracts Can Never Be Negative?

asked

Save over 60% on Brokerage

We can help you save between 60% to 90% brokerage fee & taxes. Contact us today...

NamePhone
EmailCity
State
Are you a day trader?

No, intrinsic value can never be negative. It is positive when the option is in the money (ITM) and it is zero when the option is out of the money (OTM). It cannot be lower than zero.

The intrinsic value of an option contract is the value a trader would get if it were exercised today. 

For call options, intrinsic value is calculated as-

Intrinsic Value = Spot Price - Strike Price

For put options, intrinsic value is calculated as-

Intrinsic Value = Strike Price - Spot Price

Now, let's understand why intrinsic value cannot be lower than zero.

It is because options contracts give traders a choice to exercise or not exercise the contract. A trader will only exercise the option or the choice when it is profitable to him. If he is in a loss he would allow the options to expire worthlessly and lose the premium paid for buying the option. He won't be losing any more money than the premium paid at the time of buying the contract.

Let's take an example to understand it better. Let's say you buy a call option of ABC stock with a strike price of ₹ 200. You paid ₹ 10 per share as the premium for the option. The ABC stock is currently trading at ₹195, but you expect it to go up. It must go above ₹ 200 to be profitable.

Now, say at the end of the month, it doesn't go up and is at ₹ 196. Will any trader exercise it? No, because who would pay ₹ 200 for a stock which is available at ₹ 196? The trader will exercise his option or choice to not exercise the contract and will allow the option to expire worthlessly.

Yes, he will lose the premium of ₹ 10 paid and so one can say that his trade is negative but the intrinsic value of the options never goes below zero.

answered


Comments

No comments found. Be the first to post a comment.


List of all questions Ask your question


More Options Trading Basics Questions...

  1. How do options work?
  2. What are the different types of options?
  3. What is the strike price of an option?
  4. What is the Expiration Day of Options?
  5. How do I trade options?
  6. What is the difference between futures and options?
  7. How is Nifty traded?
  8. What happens if an option expires out of the money?
  9. Is there any Margin payable in Options?
  10. How are the Options contracts settled?
  11. What are Covered Options?
  12. What are Naked Options?
  13. What is an American Option?
  14. What is an European Option?
  15. What is In-The-Money (ITM), At-the-money-option (ATM) and Out-of-the-money-option (OTM) in Options?
  16. How to decide on whether should I buy or sell Call or Put options?
  17. Can I trade on options of any stock or Index?
  18. What is the difference between square off and exercise an Option?
  19. What is intrinsic value of the option? How to calculate intrinsic value of an option?
  20. What is time value of an Option?
  21. What are moving averages in options trading?
  22. What is Assignment in Options?
  23. How are options different from futures?
  24. What are the factors that affect the value of the premium of an Option?
  25. What are different pricing models for options?
  26. How the premium paid on options is calculated?
  27. What are Option Greeks and its use in Option trading?
  28. What is shorting/writing/selling in Options trading?
  29. I have bought an option & paid the premium for it, how to settle it?
  30. Do Option buyers have the same rights that as stock buyers?
  31. What is the contract cycle for Options in India?
  32. How does the probability of price movement affects the price of an option?
  33. What is the difference between trading stocks versus options?
  34. What is open interest and volume in options?
  35. What is the options market?
  36. What is nifty futures and options?
  37. What is an option trade?
  38. Is binary options trading legal in India?
  39. What are different types of exotic options?
  40. How to trade nifty Options intraday?
  41. Can I trade in US options from India?
  42. What are options trading hours in India?
  43. What is NSE option expiry time?
  44. Can I buy/sell Options in pre-market trading session?
  45. What is call & put option in bank nifty?
  46. What is the difference between selling a call option and buying a put option?
  47. What is NSE F&O lot size?
  48. What are options trading advantages?
  49. What is options trading after hours?
  50. What are options trading charges?
  51. What are options trading exchanges in India?
  52. What is the difference between options trading and Forex trading?
  53. What is the difference between options trading and stocks trading?
  54. What is the minimum amount required for Options trading?
  55. What are Index Options?
  56. What are weekly Options?
  57. What are Long Dated Options?
  58. How to identify if a particular option contract is American or European style?
  59. What are Option contract adjustments?
  60. Why The Intrinsic Value Of Options Contracts Can Never Be Negative?

List of all questions Ask your question









Search Chittorgarh.com:

Download Our Mobile App

Android App iOS App