Price logic
Intrinsic value plus time value
The option price = intrinsic value + time value. Time value gets smaller as the option moves closer to expiration. This is reflected by the theta value.
Example: A call option costs 8 EUR, spot is 105 EUR, and strike is 100 EUR. Then 5 EUR is intrinsic value and 3 EUR is time value.
The split in compact form
- Spot 105 minus strike 100 = 5 EUR intrinsic value
- Premium 8 EUR minus intrinsic value 5 EUR = 3 EUR time value
The key Greeks make these price moves easier to read:
- Delta How much does the option move when the underlying moves?
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Theta How much time value does the option lose per day?
Time decay depends strongly on moneyness: ATM options usually lose time value fastest near expiration. ITM options also contain intrinsic value, so their time decay is often less pronounced and more linear. OTM options consist only of time value; that value goes to zero by expiration, but the final decay is often less steep than with ATM options.
- Gamma How much does delta itself change?
- Vega How much does price react to changing IV?
Sources: DeltaValue, Extrinsic value, DeltaValue, Option Greeks, LYNX, Option Greeks, LYNX, Theta