Fluctuations in option prices can be explained by intrinsic value and extrinsic value, which is also known as time value. An option's premium is the combination of its intrinsic value and time value. Intrinsic value is the in-the-money amount of an options contract, which, for a call option, is the amount above the strike price that the stock is trading. Time value represents the added value an investor has to pay for an option above the intrinsic value. This is the extrinsic value or time value. So, the price of the option in our example can be thought of as the following:
• Call Options – Give the buyer the right, but not the obligation, to buy the underlying at the stated strike price within a specific period of time. Conversely, the seller of a call option is obligated to deliver a long position in the underlying futures contract from the strike price should the buyer opt to exercise the option. Essentially, this means that the seller would be forced to take a short position in the market upon expiration.
Just like many successful investors, options traders have a clear understanding of their financial goals and desired position in the market. The way you approach and think about money, in general, will have a direct impact on how you trade options. The best thing you can do before you fund your account and start trading is to clearly define your investing goals.
Based on data from IHS Markit for SEC Rule 605 eligible orders executed at Fidelity between April 1, 2018 and March 31, 20198. The comparison is based on an analysis of price statistics that include all SEC Rule 605 eligible market and marketable limit orders of 100-499 shares for the 100 share figure and 100–1,999 shares for the 1,000 share figure. For both the Fidelity and Industry savings per order figures used in the example, the figures are calculated by taking the average savings per share for the eligible trades within the respective order size range and multiplying each by either 100 or 1000, for consistency purposes. Fidelity's average retail order size for SEC Rule 605 eligible orders (100 -1,999 shares) and (100–9,999 shares) during this time period was 430 and 842 shares, respectively. The average retail order size for the Industry for the same shares ranges and time period was 228 and 333 shares, respectively. Price improvement examples are based on averages and any price improvement amounts related to your trades will depend on the particulars of your specific trade.
Sometimes corporations enter the forex market in order to hedge their profits. A US company with extensive operations in Mexico, for example, may enter into a futures contracts on US dollars. So, when it comes time to bring those Mexican profits home, the profits earned in pesos will not be subject to unexpected currency fluctuations. The futures contract is a way of securing an exchange rate and eliminating the risk that peso will lose value versus the dollar, making those profits worth less in dollars.
• Call Options – Give the buyer the right, but not the obligation, to buy the underlying at the stated strike price within a specific period of time. Conversely, the seller of a call option is obligated to deliver a long position in the underlying futures contract from the strike price should the buyer opt to exercise the option. Essentially, this means that the seller would be forced to take a short position in the market upon expiration.
In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.
Based on data from IHS Markit for SEC Rule 605 eligible orders executed at Fidelity between April 1, 2018 and March 31, 20198. The comparison is based on an analysis of price statistics that include all SEC Rule 605 eligible market and marketable limit orders of 100-499 shares for the 100 share figure and 100–1,999 shares for the 1,000 share figure. For both the Fidelity and Industry savings per order figures used in the example, the figures are calculated by taking the average savings per share for the eligible trades within the respective order size range and multiplying each by either 100 or 1000, for consistency purposes. Fidelity's average retail order size for SEC Rule 605 eligible orders (100 -1,999 shares) and (100–9,999 shares) during this time period was 430 and 842 shares, respectively. The average retail order size for the Industry for the same shares ranges and time period was 228 and 333 shares, respectively. Price improvement examples are based on averages and any price improvement amounts related to your trades will depend on the particulars of your specific trade.
For example: Tomatoes are cheap in July and will be expensive in January, you can’t buy them in July and take delivery in January, since they will spoil before you can take advantage of January’s high prices. The July price will reflect tomato supply and demand in July. The forward price for January will reflect the market’s expectations of supply and demand in January. July tomatoes are effectively a different commodity from January tomatoes.
In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.

Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock. Speculating with a call option—instead of buying the stock outright—is attractive to some traders since options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock.


When buying a call option, the strike price of an option for a stock, for example, will be determined based on the current price of that stock. For example, if a share of a given stock (like Amazon (AMZN) ) is $1,748, any strike price (price of the call option) that is above that share price is considered to be "out of the money." Conversely, if the strike price is under the current share price of the stock, it's considered "in the money." 
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