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Definition, Examples & Resources:Extrinsic Value'

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What is Extrinsic Value in Options Trading ?

Extrinsic Value
Extrinsic value is also known as time value. The amount of time remaining in the option is a key value for pricing and determines how long the underlying has to move up or down at current or future volatility. Options pricing consists of two components: extrinsic value, and intrinsic value. Intrinsic value is defined by how much the option is in the money against the underlying (stock) at its current price. See the example below for a walkthrough.  The extrinsic value is the remaining value of the option, once intrinsic value is subtracted, and its value is associated with time and volatility risk in the option contract or spread.

How to Use in Your Brutus Options Ranker Strategy

Extrinsic Value can be an important criterion to add to your Brutus Options Ranker Strategy.

If you are building a net-short options trading strategy you may look to maximize the amount of extrinsic value in the contract in order to maximize the amount of total Extrinsic Value available to collect if the trade expires out of the money. You will want to add Extrinsic Value to your strategy with an objective to maximize the value as an options seller.

If the trader is trading a net-long options strategy, then Extrinsic Value is the amount the buyer needs to pay (or subject to lose) if the underlying (stock) remains at the same price. You will want to add Extrinsic Value to your strategy with an objective to minimize the value as an options buyer.

Where to find Extrinsic Value in the Brutus Options Ranker Criteria Panel

Extrinsic Value can be found on the Strategy Tree Builder page within the Brutus Options Ranker under the Criteria List and the General Panel:

Breaking Down Extrinsic Value

Let's break down Intrinsic and Extrinsic Value with an example. Apple Inc. ($AAPL) at the time of writing is $139.91/share. Let's take a look at options on AAPL that are expiring in 243 days.

The intrinsic value is the amount the option is currently in the money, or: Intrinsic Value = Current Stock Price - Strike Price $4.91 (Intrinsic Value) = $139.91 (stock price) - 135 (strike price) Now, since the option's mid price is $12.50 we have everything we need to calculate the Extrinsic Value: Extrinsic Value = Option Price - Intrinsic Value $7.59 (Extrinsic Value)= $12.50 (option price) - $4.91

Video on Extrinsic Value

Broader Term

  • Options Pricing

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