How to Understand Option Prices SIMPLY

✅ New to options trading? Master the essential options trading concepts with the FREE Options Trading for Beginners PDF and email course: https://geni.us/options-trading-pdf

✅ Open and fund your first tastytrade brokerage account to earn up to $5,000 in account funding bonuses and get my options strategy analysis course for free ($247 value): https://geni.us/tastytrade

Option prices can be super confusing to understand as a beginner options trader. Learn how to understand them!

When you look at an options chain, there are many options with different prices. How can we understand where these prices come from?

0:00 Intro
0:10 Intrinsic Value of Calls: NVDA Example
1:52 Intrinsic Value of Puts: TSLA Example
3:16 The Second Possible Option Price Component
3:39 Extrinsic Value vs. Time to Expiration
5:13 Extrinsic Value vs. Stock Volatility
6:56 Option Pricing vs. Strike Prices
9:02 Bringing it All Together

The primary component of option pricing is intrinsic value, representing the profit potential from exercising an option at the current stock price. For instance, a call option with a strike price of $100 on a $115 stock yields $15 of intrinsic value.

However, options often cost more than their intrinsic value due to extrinsic value, influenced by time to expiration, stock volatility, and the option's moneyness (ITM or OTM).

More time until expiration amplifies extrinsic value, increasing the opportunity for significant stock price movements that could raise the option's price. Hence, extrinsic value is often termed "time value." At expiration, options only hold intrinsic value.

Extrinsic value also scales with a stock's volatility. High-volatility stocks lead to costlier options due to more significant potential price fluctuations.

Lastly, the strike price relative to the stock price dictates extrinsic value. Far OTM options are cheaper, reflecting the lower likelihood of becoming ITM by expiration. Conversely, options likely to expire ITM command higher prices.

In summary, option prices hinge on their potential value changes before expiration, determined by the time to expiration, stock volatility, and how far OTM or ITM the strike price is.

=== Recommended Videos ===
➥ Options Trading for Beginners:    • Options Trading for Beginners (The UL...  
➥ Vertical Spreads for Beginners:    • The Vertical Spread Options Strategie...  

Disclaimer: Nothing contained in our content constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction, or investment. Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involve substantial risk of loss and are not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past performance is not necessarily indicative of future results. I am not a financial advisor. The ideas presented in this video are for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.

Disclosure: Some of the links in the video description are affiliate links, which means I receive a small amount of compensation if you sign up for these services using my unique link. If you want to support the channel, it's a great way to say thank you! You can always head directly to the websites mentioned in the videos to avoid giving affiliate credit, but you may miss a signup bonus.

#OptionsTrading tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.