Course Name: Options Volatility Trading: Concepts and Strategies, Section No: 7, Unit No: 11, Unit type: Notebook
In the plot labled "Intrinsic Value and Payoff of Call" the chart shows the value of the call and payoff value of the call in the chart. This chart shows the call option's value, not the option's intrinsic value. The intrinsic value of the call option would always be zero when the price of the underlying is below the strike.
Hello Kevin,
To clarify, the plot 'Intrinsic Value and Payoff of Call' shows the intrinsic value of an option and the payoff during the expiry or closing of the position. The plot shows the intrinsic value of the options contract at different strike prices and as the strike price increases, the intrinsic value also increases. On the other hand, the value of call option during payoff will be 0 till the call option becomes in the money.
Hope this helps!
No. The plot labeled intrinsic value is not the instrinsic value of the option. The intrinsic value of an option does not increase until the option is in the money, and if the option is not in the money it has no intrinsic value. The plot labeled intrinsic value is actually the calculated value of the option based on both the intrinsic and extrinsic value of the option at different strike prices. This whole section shows intrinsic value of an option incorrectly. The intrinsic value of an option, which is the "in-the-money" value of the option, is not the same as the value of an option, which consists of both the intrinsic and extrinsic values combined. A chart of intrinsic value of an option looks exactly like the payoff diagram.
Hi Kevin,
Thanks for pointing this out. The relevant enhancements will be made to this section of the course.