Analogies for extrinsic value.

Applicable to: "to someone who has never heard the word and has no desire to learn about them."

Sticking with the ag suggestions, how about you're a farmer who grows a very desirable fruit that is in limited supply. You could call it "Le Grand Orange" ... and no, I'm not talking about Rusty Staub :D. When it ripens, the initial harvest is large and the yield tapers off over a few months.

Before it ripens, middlemen make deals with you to purchase at various prices across time. Since the harvest is larger in the beginning, the wholesale price is lower. They pay more for the later yields since the supply will be less.

The intrinsic value is what you consider to be your core cost (seed, irrigation, labor, etc.). The extrinsic value is your profit markup which is larger for 'time' because at that point, supply will be more limited.

It's not a perfect analogy but it's easy to understand.
 
Explain it to him as you would cost basis on shares. If you're up then you're ITM. I typically use an option on property analogy.

McGinnis is retarded. You're doing yourself a disservice by not blocking him.
 
destriero said:
Explain it to him as you would cost basis on shares. If you're up then you're ITM. I typically use an option on property analogy.

McGinnis is retarded. You're doing yourself a disservice by not blocking him.
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How can you not like a guy whose name is a tautology? The guy probably hasn't slept in anything but a pile of his own vomit in 10 years. :D
 
I'd like to say thank you very much to everyone. :thumbsup::thumbsup::thumbsup::thumbsup::thumbsup:
Hopefully, one day this year I'll be able to share the finished product with ya' all.
 
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Coincidentally, I just came across this explanation on Stack:

As an analogy, consider people betting on an (American) football game between Team A and Team B.

Let's make buying the option analogous to betting on Team A. Then selling it is analogous to betting against Team A.

The sale price of the option is analogous to the odds a bookie will offer.

The expiration date is analogous to the end of the game.

Being OTM is analogous to Team A being behind. If you want to sell an option, then you are betting against Team A, and you are asking the buyer to bet for them to win.

If Team A is behind, but it's only the first quarter, then there's still a chance that Team A will have a comeback. But as the game goes on, the probability of that happening (given a constant score differential) goes down.

Similarly, if the stock price stays the same, then as time goes on the price of an OTM option goes down. This is known as "theta".

If you call up a bookie right before the end of the game and tell them that you have, say, $1000 that you want to put down on Team A losing (so you're asking the bookie to bet that Team A will win), the bookie would have to offer really short odds for it to be fair; for instance, they might have to offer $1 to your $1000. And the hassle of setting up the bet is probably worth more than the $1. So they'll just refuse to take that bet.
 
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