Lesson 4 — Contract Value and Position Exposure
Understand intrinsic value, extrinsic value, time value, volatility sensitivity, and how option exposure changes under different scenarios.
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Login to Track ProgressExplains contract value, intrinsic value, time value, moneyness, and how value changes as expiration approaches.
Key Concepts
- intrinsic value
- time value
- ITM
- ATM
- OTM
- decay
Homework
Calculate intrinsic/time value for 10 example options using simple scenarios.
Quiz Questions
- What is intrinsic value?
- What is time value?
- What does OTM mean?
1. Explain intrinsic value and extrinsic value in your own words.
2. Choose one call option and calculate whether it has intrinsic value.
3. Create three scenarios for an option: price rises, price falls, volatility rises.
4. Write why options are called nonlinear instruments.
5. Identify breakeven for a simple option example.
- 1. What is intrinsic value?
- 2. What is extrinsic value?
- 3. What is time value?
- 4. Why does time affect option premium?
- 5. Why does volatility affect option premium?
- 6. What does nonlinear exposure mean?
- 7. What is breakeven?
- 8. Why is scenario analysis important?
- 9. Why is premium not enough to understand risk?
- 10. What happens to an out-of-the-money option at expiration if it remains out of the money?