Understanding Time Value in Intraday Options Trading

To better understand time value of the intraday options pricing, one needs to consider theoretical valuation of implied volatility for online stock trading.

What is Implied Volatility and Its Time Value Connection?

Implied dynamic is a theoretical volatility value, which represents the volatility of a stock price. It is calculated by replacing original option price, option strike price, stock price and the option expiration date into the equation developed by Black-Scholes.

Options with volatile stocks usually cost more than those with low dynamics. This is because volatile security option has more chance to realise in the money option before its due date (expiration time). Most buyers prefer high volatile security options than the low volatile security options.

Implied volatility is important parameter for forecasting market value of a likely movement over certain period of time in terms of hours or days or weeks.

Time Value in Options

Thus, option price comprises of time value and intrinsic price.

Time Value + Intrinsic Value Defined = Option Price Defined

Time value is the calculation of the money that the option is valuated in time duration the option has until its due date (expiration time).

Longer the duration the option has until its due or expiration date, more is the time value of this option. Time value of an option is negligible or zero if the option has lapsed due to expiration. Intrinsic value is the difference between prevailing market stock price and option strike price.

Intrinsic Value  Defined =  Current Security or Stock Price – Option Strike Price

On the other hand, for in the money put options, intrinsic value is calculated by the difference between option strike price and prevailing market stock price. If the prevailing stock price is lower than the call option strike price, this option is known as an out of the money option. It only has calculated time value.

It is known as an in the money option when the call option with strike price is lower than the current market stock price. Time value for this option is accordingly calculated along with intrinsic value. It is known as near or at the money option when strike price is close to the prevailing market stock price. Thus knowing time value for options trading is decisive information that determine intraday trading tips for stock market analysers.

Time Value for Call/Put Money Options

Call and put spread is established by buying in the money or near the money option and selling out of the money option over time. When the stock price rises, in the money call option, you make profit and in the out of the money option when you sell stocks you may lose money. However, due to the changes in the delta value, when the stock price rises, in the money call option, price also rises with a rate higher than compared to the out of the money call option.

When you calculate the profit including loss amount, you find that you still make some profit. The reason of selling the out of the money option is to secure the invested money from the depreciation of time value happening in the money call option, if the stock price drops. However, if the share price sharply declines, this will be followed by an unlimited loss. This is time to consider stop loss strategy. This strategy conversely also shows maximum profit, it happens when stock price rises over, in the money option strike price.