An Overview of Intrinsic vs. Extrinsic Value in Options Trading
Retail traders in the crypto space often engage in options trading, but it’s important to understand the difference between intrinsic and extrinsic value. This article will provide an overview of these two components, explain how to calculate them, discuss strategies using these values, and provide tips for profiting from options trades.
Key Points:
- Every options contract has intrinsic value and extrinsic value.
- Intrinsic value is the amount an option is in-the-money, while extrinsic value is the additional value above intrinsic value.
- Intrinsic value can be calculated by subtracting the strike price from the current share price, while extrinsic value is determined by subtracting intrinsic value from the option premium.
- Strategies using these values include buying undervalued options, selling overvalued options, and protecting profits with intrinsic value.
- Traders can profit from options trading by selling overvalued or undervalued options, selling covered calls, selling cash-secured puts, using calendar spreads, and rolling options outward.
Hot Take:
Understanding intrinsic and extrinsic value is crucial for successful options trading. By utilizing these values, traders can maximize profits, hedge against risks, and make strategic decisions. With the right approach, options trading can be a profitable venture in the crypto space.
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