How to Buy Stock Options - Calculate the Intrinsic Value
Are you looking to buy stock options? There are some things you may need to learn before throwing your money away. It is important to calculate the intrinsic value of the option contract before making your trade. The intrinsic value of an option is the portion of contract's value that is "in the money".
- Difficulty:
- Moderately Easy
Instructions
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1
When you buy stock options, first determine if you are buying a put or a call contract. Purchasing calls on a stock represent a bullish behavior on the underlying security. Likewise, purchasing puts on a stock represent a bearish behavior on the underlying security.
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2
Identify the strike price of the option contract before you buy stock options. The strike price for call contracts represent the price where the stock can be bought. On the other hand, the strike price for put contracts represent the price where the stock can be sold.
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Calculate the intrinsic value for a call contracts by taking the current stock price minus the strike price of the contract. For example, if the current stock price is $5 and the strike price is $3, the intrinsic value for the call contract is $2.
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Subtract the stock price from the strike price to calculate the intrinsic value for a put contract. For example, if the current stock price is $6 and the strike price is $10, the intrinsic value for the put contract is $4.
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Tips & Warnings
The higher the intrinsic value of an options contract, the greater chance you will be in the money on the expiration date.
If the intrinsic value is a negative number, the contract is considered out of the money.
Buying stock options can be highly volatile and risky.
