Zero- value options. Black-Scholes-Merton (BSM) Option Valuation Model

Option time value - Wikipedia

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Glossary Short answer: No. It is positive for zero- value options the money options.

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It is zero for out of the money options. Intrinsic Value Calculation Intrinsic value of an option is the value one would gain from exercising the option immediately.

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It is different for calls and puts. It is that you hold the option until expiration and it expires worthless, making you lose the entire initial investment the option premium paid. Will you exercise the option? Fortunately, options give you the right, but not the obligation to exercise.

Generally, you will only choose to exercise when doing so would be profitable for you.

Article Reviewed on July 31, Michael J Boyle Updated July 31, An option contract's value fluctuates based on the price of the asset underlying it, such as a stock, exchange-traded fund, or futures contract. Each one of these situations affects the intrinsic value of the option. The amount of time remaining before the option contract expires also plays a role in the value of the option, which in turn affects how high or low a price—the premium—the buyer is willing to pay for the option. The buyer could exercise their right under the option contract and buy the underlying asset for less than its current value.

Therefore you choose to not exercise the option and just let it expire. An option always gives you two alternatives: to exercise or not to exercise.

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For calls it is underlying price minus strike price underlying price minus 20 in our example. For puts it is strike price minus underlying price.

The outcome of not exercising is always zero. Do nothing — gain nothing — lose nothing. It makes sense to always choose the better of the two outcomes, which is never worse than zero.

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