Options concepts

Question 1

What is intrinsic value?

Answer 1

The part of the option’s value that is in-the-money.

Question 2

What is time value?

Answer 2

The part of an option’s value that isn’t intrinsic. Out-of-the-money options have no intrinsic value – only time value.

Question 3

What is delta?

Answer 3

Change in option price
Delta = __________________________________

         Change in underlying asset price (the higher the delta , the faster the option price moves as compared with the stock price)

Question 4

What is “delta neutral trading”?

Answer 4

Reducing risk exposure to delta by bringing the delta value close to zero – to avoid wild swings. Doesn’t mean risk-free.