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Option Pricing

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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.

Options are priced fundamentally from the forces of supply and demand, however, we quantify the value of each component by splitting the value into intrinsic and extrinsic value.

Intrinsic value is derived from the hypothetical scenario if you had exercised the option, how much you would get out of it. Extrinsic value is by nature more complex to define since its value comes from a variety of things: time premium, implied volatility, and the distance from the stock price. By adding these components together we get the total price of the option.

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