How is the cost of the option calculated?
You must first understand the inner and outer meaning. The prize of choice consists of both of these values. Internal is the value of the option if you use it according to the futures contract and then offset it. For example, if you have a soybean call on November 5 and the futures price for this deal is $ 5.20, there is an internal value of .20 for this option. Soybeans are a 5,000-pound contract, so 20 cents is multiplied by 5,000 = $ 1,000 for this option.
Now let’s say the prize of the same $ 5 soybean call is $ 1,600. $ 1,000 of the cost is internal value and the other $ 600 is external value. External value consists of the value of time, the reward of variability, and the requirement for this particular choice. If there are 60 days left until the end of the selection, it is worth more time than 45 days left. If the market has large price movements from bottom to top, the volatility premium will be higher than the small price movement market. If many people get the price of this full holiday, this demand also artificially increases the reward.
How much will an option premium move in relation to a major futures contract?
You can understand this by finding the delta factor of your choice. The Delta factor tells you how much the premium change will be in your choice based on the action of the future contract. Let’s say you think that by the end of December gold will rise by $ 50 / or $ 5000 / ounce. You got a choice with a .20 or 20% delta factor. This option should earn about $ 1,000 in the premium value of the expected $ 5,000 gold futures price action.
Can an option speculator make a profit before the intrinsic value of the option?
Yes, as long as the selection premium increases enough to cover your operating expenses such as commissions and fees. For example, you have a corn call between December 3 and December corn is $ 270 / bushel and your operating costs are $ 50. Let’s say you have a 20% delta in your choice, and in December the future corn market is going up 10 cents / bushel to $ 2.80 / bushel. Corn is the contact of 5000 bush, so 1 cent is multiplied by 5000 = $ 50. Your selection prize will increase by about 2 cents = $ 100. Your break was $ 50, so you have a $ 50 gain that has no intrinsic value because you’re still out of 20 cents.
Future and option investments are very risky and only risk capital should be used. Past performance is not an indicator of future results. Cash, options and futures do not necessarily respond to similar stimuli. There is no guaranteed good trade.