What is the difference between extrinsic and intrinsic value in options?
• An option has intrinsic value if it would be profitable to exercise the option. Extrinsic value is just ‘time value’ and reflects the amount of money that buyers are willing to pay in hope that an option will be worth exercising at or before expiration. For example, if Dec corn futures is selling at 2.16 and a Dec corn 2.00 call is selling for 18, then the intrinsic value equals 16 cents (the difference between the strike and the futures) and the time value of 2 cents (the difference between the total premium and the intrinsic value). An options time value decreases as it approaches expiration. It will have no time value at expiration and any remaining value will consist of only intrinsic value. * • Calls and Puts confuse me, is there any solid definition that is helpful in understanding them? • Having a solid understand of futures will help provide a foundation in understanding options trading. A call is the right but not the obligation to buy the underlying futures at that strike p
