How is the option price determined?
First you need to understand the meaning of internal and external. The option premium consists of both of these values. The intrinsic value of an option if you used it before a futures contract and then reimbursed. For example, if you have a soybean call on November 5, and the futures price for that contract is $ 5.20, then there is an intrinsic value of .20 for that option. Soybeans sign a contract for 5,000 bushels, so 20 cents multiplied by 5,000 = intrinsic value of $ 1,000 for that option.
Now let’s say the same soybean call on November 5 costs $ 1,600 as a bonus. $ 1,000 costs are intrinsic value, and the remaining $ 600 is external. External value consists of time value, volatility premium, and demand for that particular option. If the option has 60 days to go before it expires, it has a longer time value than 45 days. If there are large price changes from low to high in the market, the volatility premium will be higher than the market for small prices. If many people buy exactly the exact price, this demand can artificially raise the premium.
How much will the option premium move in relation to the underlying futures contract?
You can understand this by figuring out the delta factor of your option. The delta ratio tells you how much the premium in your option will change based on the movement of the underlying future contract. Let’s say you think gold will rise in price by $ 50 an ounce in December or by $ 5,000 a contract before it expires. You bought an option with a delta ratio of .20 or 20%. This option should receive approximately $ 1,000 in the amount of a premium expected movement in gold futures prices of $ 5,000.
Can an option speculator make a profit earlier than the option has intrinsic value?
Yes, as long as the option premium is increased enough to cover transaction costs such as commission and commission. For example, you have a corn call on Dec. 3 and a corn bell for $ 270 per bushel, and a transaction cost of $ 50. Suppose your option has a 20% delta, and the market for future corn in December will increase by 10 cents a bushel to $ 2.80 a bushel. Corn is a contact of 5,000 bushels, so 1 cent multiplies by 5,000 = $ 50. Your premium option will increase by approximately 2 cents = $ 100. Your break was even $ 50, so you’ll get $ 50 in profits with no intrinsic value, as the money is still 20 cents left.
Investing in futures and options is very risky, and only risk capital should be used. Preliminary figures do not indicate future results. Cash, options and futures do not necessarily respond to similar incentives in a similar way. There are no guaranteed good deals.