What Are Option Strike Prices

Intrinsic value is simply how much real dollar value the Option has, if any. Call Option with a strike price that is above where the market is trading has no intrinsic value, ONLY time value, which is the amount of time the option has before it expires. It's not shown on the above chart but these options have about 90 days before they expire.

Starting at the bottom on the chart above, you see the 103.000 strike price is well below where the market is trading. It has both Intrinsic (real money) value AND time value. It’s the most expensive of the three because of how much intrinsic value it has. You can see that the 103.000 strike price has an Intrinsic value of $975.00. The expiration date for each Option is the same; 90 days.

Look at the value of the 103.000 Call, it's worth $2,175.00. It has $975.00 of intrinsic value. the rest is time value. So, $2,175.00 - $975.0 is $1,200.00 which is the Extrinsic value of that option.

Extrinsic value is simply time value. In the case of a Call option, it has no "real money" value if the price of the underlying commodity is below the strike price.

There are a couple of things that determine how much Extrinsic value is for that strike price.

In the above chart, the 107.00 Call cost less than the others because it is far way from where the market is trading. The 107.00 Call has zero Intrinsic value, only extrinsic value.

A Call Option with a strike price that is BELOW where the market is trading is called an In-The-Money option since it has Intrinsic or real money value. The 103.00 Call in the above chart is worth $1,525.00 and is $975.00 "in the money".

(In the case of a Put Option that has a strike price ABOVE where the market is trading would be in the money.)

The second Call at 105.00 is At-The-Money because it’s at or close to the future closing price that day. The value of the 105.00 Call is $1,525.00. Since it's At-The-Money it has little, if any, intrinsic (real money) value, it's almost all Extrinsic, or time value.

There are many different strike prices and some markets have strike prices that are very close to each other while others are more spread out. So not every option will ever be "At-The-Money". Most people will say that an Option is at the money when the strike price is near or at where the market is trading.

An Out of the money option is when the options strike price has no Intrinsic value (real money value) In the case of a Call Option the strike price is above where the market is trading and in the case of a Put Option the strike price is below where the market is trading.

In the above chart, I have added four different strike prices using Puts. You can see that they are labeled either In, At, Out, or Deep Out. Let's take a look at each of them and why the prices are so different.

The 92.00 Put is above where the current price is so it's In-The-Money and it's the most expensive of the four options at $1,790.00. The reason it's more expensive is that it has Intrinsic value PLUS it still has time value.

The 91 Put is At-The-Money and has little, if any, Intrinsic (Real money) value. All it has is Extrinsic, time value. Since it's "At-The Money" it has more value than the 90.00 Put which is Out-Of-The-Money. It's value is $1,240.00.

The 90.00 Put is below where the current price is so it's Out-Of-The-Money and only worth it $790. All it has is time value and no Intrinsic or real money value.

At the bottom of the chart is the 86.00 Put and it's Deep-Out-Of-The-Money and has only a small chance of ever being worth anything at expiration. That's why it's only worth $120.00. Traders call these kinds of Options "cheap options" because they cost almost nothing. However, I think buying cheap Options is for Chumps! Read that again.

We talked about this earlier but the longer an option has (number of days) until it expires the more it will cost. The reason being is the longer the option has until expiration, the more risk the seller has. More risk = higher cost. It would be like a car or homeowner's insurance. A policy that covers you for a year is going to cost more than one that only covers you for a month. Therefore, Time is Money. The insurance company is taking more risk covering your home for a year than it does covering it for a month.

In figure 1.1 below, an option with 180 days left until it expires is worth much more than an option with only 30 days left until expiration. This “value” only has to do with the time value of the option. It has nothing to do with the strike price of the option which we will discuss in the next few pages.

In the last thirty days of an option’s life, the value of the option deteriorates quickly because people don’t think that it will gain much in value during that time.