1. What is Option Value?

Option value represents the total worth of an option contract, consisting of intrinsic value (the immediate profit if exercised) and time value (the potential for future profit before expiration).

2. How Does the Calculator Work?

The calculator uses the simple option value formula:

Where:

• \( \text{Intrinsic Value} \) — The immediate profit if the option were exercised now
• \( \text{Time Value} \) — The additional value based on time remaining until expiration

Explanation: This formula provides a basic calculation of an option's total value by combining its current worth and future potential.

3. Importance of Option Value Calculation

Details: Understanding option value is crucial for options trading, risk management, and making informed investment decisions in derivatives markets.

4. Using the Calculator

Tips: Enter both intrinsic value and time value in dollars. Both values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is intrinsic value?
A: Intrinsic value is the amount of profit that would be realized if the option were exercised immediately.

Q2: What factors affect time value?
A: Time value is influenced by time until expiration, volatility, interest rates, and the difference between strike price and underlying asset price.

Q3: Can option value be negative?
A: No, option value cannot be negative as both intrinsic value and time value are always non-negative.

Q4: How does time decay affect option value?
A: As expiration approaches, time value decreases (time decay), reducing the total option value if intrinsic value remains unchanged.

Q5: Is this calculation applicable to both calls and puts?
A: Yes, this basic formula applies to both call and put options, though the calculation of intrinsic value differs between them.