The stock rallied 150% and he was short and he wants to know why he lost money? LOL. You might be right. He shouldn't be trading.
BS info in OIC FAQ
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The stock rallied 150% and he was short and he wants to know why he lost money? LOL. You might be right. He shouldn't be trading.
Premium as defined by Investopia (first link in my google result when searching "option premium"):
http://www.investopedia.com/terms/o/option-premium.asp
"
Option prices quoted on an exchange such as the Chicago Board Options Exchange (CBOE) are considered premiums as a rule because the options themselves have no underlying value. The components of an option premium include its intrinsic value, its time value and the implied volatility of the underlying asset. As the option nears its expiration date, the time value will edge closer and closer to $0, while the intrinsic value will closely represent the difference between the underlying security's price and the strike price of the contract."
That means:
premium = intrinsic value + extrinsic value
Ie. simply the current market value of the option.
Not your definition or that of OIC; that old definition must be a relict of the stone age of options trading.
Amen! Just my saying.
But in the question (cf. first posting or the link therein to the said OIC FAQ) it explicitly states that Call ist meant:
he writes " I paid $6.40 for a 20 strike call with two years until expiration when the stock was trading at $20 per share".
Can you imagine: that whole confusion comes directly from the "Options Industry Council", OIC....
Seems to be a useless institution or whatever it might be.
Here's a screenshot of the original:
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Clearly the question and answer is wrong. So what's more likely, the 2 paragraph answer is wrong or there is a four letter typo?
Nor should some of the people in this thread
You are right, it was a typo. Blame it on the greeks!
+1Nor should some of the people in this thread
I agree. Assuming that the underlying was at $20.00 and is now at $50 and the premium paid was $6.40 when the call option was purchased (6 months ago) then the intrinsic value would be $30 and the extrinsic value would be (if the premium stayed at $6.40) 36.40 (30 + 6.40). However the option, which was purchased 24 months out now has lost 6 months of time (Theta) value. How much value we don't know from the information available. That is not, contrary to the OICs explanation, a function of Delta but rather a function of Theta. Delta is simply theoretical estimate of how much an option’s premium may change given a $1 move in the underlying. If, for example, an option has a Delta of 0 then that means the options premium will change 10 cents with a $1.00 move in the underlying. What really affects the the value of options premium over time is Theta.
Both long and short options are effected by Theta on option premium. Theta is represented in an actual dollar or premium amount and may be calculated on a daily or weekly basis. Theta represents, in theory, how much an option’s premium may decay per day/week with all other things remaining the same.
If the, in the example given, if the value of the underlying option is at $50 and most, if not all, the $6.40 is gone, then most likely it's the affects of Theta that we're seeing. I only trade 5-20 days out but do know from my research that Theta on options 6-12 months out decays at a rate of .01-.02 per day all else being equal. Which means that the $6.40 could have lost almost all it's value in the 6 months that's gone by.
Best
Not me! For me premium has always been the current market value (ie. the current price) of the option.