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Understanding Extrinsic

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Extrinsic value is the amount of money that an option is worth as dictated by the market.

Intrinsic is the difference between stock price and strike price.

How does an option receive its extrinsic and what does that extrinsic tell us?

Using the Black-Scholes model the implied volatility of an underlying can be solved for from the extrinsic value.

Extrinsic value rises and falls based on demand for protection on a given stock. Options will be more expensive during times of distress.

The extrinsic value of an option is also tied directly to the time remaining to expiration.

A clear and thorough understanding of extrinsic value is vital to every options trader. Tune in to hear the trading vets, Tom and Tony, give their full breakdown.

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