Basics of Options - 3

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What is moneyness of Options?

Every Option has some price, The price consists of Intrinsic value & Extrinsic Value.😕

Don't worry, I will explain in plain terms.

Consider the below example.

Assume that, If Nifty is at 10500 & its call option, Nifty 10400 CE Jul Expiry trading at 250/-

Then, dissect our Nifty 10400 CE option value 250/- in to two parts.

1. The difference between Nifty Spot( Underlying) and Call strike price 10400 is 100. This 100 /- is Intrinsic value. This is constant( Nothing but difference between your underlying & selected strike) 

2. The remaining 150/- attributes to Extrinsic value.
This extrinsic value of Options depends on many forces, best two of them are,

A) Volatility.
B) Time Value.

So, Moneyness of Options is nothing but, Intrinsic value of Options.

Before going to learn about Greeks. It is important to learn about 

1. selecting the stock or index, where we need to do option trade.
2. Selection of Call or Put option to trade.
3. Selecting the position, whether to Buy or Sell Option.
4. Selecting the strike price in option chain.
5. Selecting the expiry. 

I will discuss few of the above in next blog.

All the best Guys.

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