𝘗𝘢𝘴𝘢𝘳 𝘔𝘢𝘭𝘢𝘮 Deals and Options Trading: A Simple Guide to Intrinsic and Time Value #am05sg

Nani?

For context, let’s imagine you’re in a bustling pasar malam (night market) hunting for a deal on a rare collector's item—say, a limited-edition plushie.

You see a stall selling it for $40, but you don’t have cash on hand. Fortunately, the seller offers you an option: for $3.25, you can reserve the right to buy it at $40 within the next week.

Here’s where intrinsic value and time value come into play:

Intrinsic Value: The Plushie is Already a Good Deal!

You check online and see the plushie is selling for $42.23 everywhere else. This means that even with your right to buy it at $40, you’re already ahead by $2.23 ($42.23 - $40). This is the intrinsic value—the portion of the option’s price that reflects its immediate worth.

IF the plushie were instead priced at $40 or less elsewhere, your option wouldn’t have intrinsic value because you wouldn’t be making an immediate profit by exercising it.

Time Value: The What-If Potential

Now, let’s talk about the remaining $1.02 ($3.25 - $2.23). Why is the option still priced above its intrinsic value? That’s because of time value.

Time value reflects possibilities:

• What if demand for the plushie surges and its price shoots up to $50 next week?
• What if there’s a sudden TikTok trend, and plushie prices skyrocket?

This "what-if" potential makes the option more valuable. The more time left before the option expires, the higher this time value, as more can happen in that period.

But as the week progresses, and nothing changes, this time value will slowly fade away—just like how the excitement for a trending item dies down.

Why At-the-Money and Out-of-the-Money Options Have No Intrinsic Value

Let’s adjust the scenario.

Imagine the plushie is also priced at $40 elsewhere (at-the-money). Your option doesn’t have intrinsic value because you’re not getting an instant bargain. But you’re still paying something (time value) for the option, hoping prices rise.

Now, suppose the plushie is selling for $38 at other stalls (out-of-the-money). Your option has no intrinsic value—why would you pay $40 to buy something you could get for less?

Here, the entire option price is just time value, betting on _potential _future gains.

The Takeaway

Options are like reserving a deal at a pasar malam. Intrinsic value is the deal you can immediately lock in, while time value is the extra cost of potential future gains.

Understanding this is key to navigating the world of options, much like bargaining at a pasar malam—you need to know when a deal is good enough to act on or when it’s just a hope for something better.

Summary:

1️⃣ Intrinsic Value: The immediate value of an option if exercised now, like scoring a bargain on a rare plushie that’s already selling for more elsewhere.

2️⃣ Time Value: The premium for possibility—what you pay for the potential of prices rising before the option expires, much like paying for the chance a plushie becomes a trendy must-have.

Image: Seedly Opinion Writer Amos (Dreamina)

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