Options Lingo #2

Intrinsic Value

Intrinsic value is the other important “IV” in the options trading world (we discussed implied volatility in this article). If your option contract has intrinsic value, it is considered in the money and will expire with a value at expiration. For example, if you buy calls at the 170 strike on a $175 stock, your call has an intrinsic value of 5.

Extrinsic Value

As you can guess, the extrinsic value is the opposite of intrinsic value. Extrinsic value is essentially the value of an out of the money option contract. For example, if a stock is trading at $175 and your option was purchased with a strike price of 180, the extrinsic value is the cost of the premium that you paid upfront to place the trade.

Bid/Ask Spread

The bid/ask spread is the difference in price between the buyers and sellers of any option contract. The bid is the price that a buyer is willing to pay for an option while the ask is the price that a seller is willing to pay for that same option. Bid and ask prices usually fluctuate throughout each trading day which can change the spread.

LEAPs

LEAP options or Long Term Equity Anticipation Security options are contracts with expiration dates that are longer than one year. For example, if you are bullish on a stock but don’t think it’s price will move up quickly in the near future, you can buy a LEAP call that expires a year or more out. This allows you to capture all of the upside potentials in the stock price between the time you purchased the LEAP and the time that it expires.