How to Understand Option Prices SIMPLY

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.

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[PFSFundingDublin]

I am an active, professional trader, coach, and teacher. This is great content, well organized and presented. Well done!

[Andrew-djwd]

Very clearly explained. Graphical presentation was simple and effective.

[rashaynebrae]

This was beautifully explained. I trade, but this was gold. I need more keep em coming!

[manuelguerrero]

I will love to heard your opinion about Technical Analysis and if you plan to make an 1-2 hour video about it.

[LMF-ctlt]

Thank you for the outstanding video Chris! I like the new graphics and the animations visually explain the concepts and tie everything together. Youtube has become the best university in the world.

[isuruudulakshitha]

It being soo long brother...
Was waiting for a vedio from u.
Ur works a soo genuine ....

[MrRiw]

Very helpful. You really hammer the point using plain talk

[nofear]

Great video as always. Question: I am trying to decide between buying a call/leap option vs buying shares for the same amount of money. With owning sticks it’s 100% delta, vs with ITM call leaps it could be 70%-80-% delta + you have the pressure of expiry date. Why would somebody own leaps ? Owning stocks makes more sense. What do you folks think?

[robhappe]

Ive been looking everywhere for an answer to this question....

Who sets the option price points for purchase? And how would i go about getting contracts that are way OTM rn set for month and months in the future? Lets say TSLS is $100 right now and i want to buy or sell a put for 18 months from now at a price of $5. I cant seem to find any way to buy contracts that are more than around $10 plus or minus the current price even if i look at 600days out. So where do i go to find these contracts?

[MattMills-dp]

another great video. also somebody's been hitting the gym, looking vascular dude

[shayschreurs]

wait so this mean there are often gaps in stock price and strike price? so I can make ensured profits if i spot these price gaps?

[viviankwok]

Do you have a school to train beginners to trade options as well as giving trade alerts?

[johnallday]

Chris, if one has a buy call option and decides not to exercise the contract and the contract expires will the buyer be stuck with that contract price or does it simply just get deleted and you one loses their premium? Trying to figure out if one has to exit a contract prior to expiration.

[JonasVanraes]

Question! I have a in the money Apple option with 80% profit, its expires 19JAN24. What is the ideal time window to sell? As close to expire date as possible or few weeks out?