Option Premiums Lecture Notes

Introduction

• Presenter: Kirk from optionalpha.com
• Topic: Understanding option premiums
• Example used: RB's combo coupon

Basics of Option Premiums

• Option Premium: Extra price paid to acquire an option contract.
• Example:
  • Roast beef combo coupon priced at $3.99, regular price $6.99.
  • Coupon sold with a $1 premium.
  • Buyer saves $2 even after paying the premium.
• Purpose: Option premium is the value added to a contract because it is not given for free.

Factors Determining Option Premium

1. Intrinsic Value
   • Current value of the option
2. Extrinsic Value
   • Remaining value including time decay and volatility

Apple Stock Example

• Examination of current options for Apple stock
• Focus on last trade price for determining the option premium
• Pricing table:
  • Calls (left side)
  • Puts (right side)
• Different premiums based on strike prices relative to the current market
• Examples:
  • Out of the money puts at $7.58 ($758)
  • Out of the money calls at $5.95 ($595)

Nature of Option Premiums

• Premiums fluctuate
  • Not fixed and change constantly with market conditions.

Understanding Net Debit and Net Credit

• Net Debit
  • Money spent at end of transactions
  • Examples: Debit spread, iron condor, butterfly, ratio spread
  • Profit requires increase in value beyond paid price before expiration
• Net Credit
  • Begin with credit; profit requires value decay below paid price before expiration
  • Examples: Credit spread, iron condor, naked puts, and calls
  • Receive premium; profit requires value decay to zero before expiration

Conclusion

• Option premiums are the price for entering/selling contracts
• Sharing and engagement encouraged

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