Replying to @Mady Mills Financial Literacy options involve risk and are not for everyone, this is for educational purposes only. Here is part 2!!!! How does an options premium work? An options premium is made up of intrinsic value and extrinsic value. Which is: exercisable value, time value and implied volatility. An option is a derivative of a financial instrument but since it has an expiration date more things affect the price :) Ask your questions! #options101 #optionspremium #optionsforbeginners

What is an options premium? Part two of however many it takes to make you understand how options work. Understand the options premium. We are only going to use a long call because if we understand a long call, everything's a mirror, a promise that will make sense. The key takeaway from the last video was when you say long, I want you to think purchased and call the right to buy. Anything that is purchased because an option is a contract between a buyer and seller, we're the buyer. We wanted to have as much value as possible. For example, if I purchased one ABC 130 day so expiration call for a premium of $5, I own the right to buy 100 shares of ABC stock at $100 per share at any time for the next 30 days and I paid $5 a share, that's the premium for that right. That premium is made up of intrinsic value and extrinsic value. Don't pay attention to this yet. So let's say when I purchase this, the stock price was at $103 per share. I paid $5 for the right to buy 100 shares of ABC at $100 at any time for the next 30 days. Well, the stock price is at 103, the intrinsic value, which is the exercise value, is going to be at least $3 because I can exercise my rights to buy at 100 and then immediately sell at the market for 103. That's a $3 profit. But that premium was $5. So anything in excess, keyword excess, is the extrinsic value. So two, three plus two is five. Get it. This excess value is time value because there's 30 days left until expiration. This is going to decay and then the other component, which we're not going to go into detail yet, but we will, is implied volatility. If there's an expected movement like earnings, it's going to inflate the extrinsic value because the option prices in an anticipated move. For example, if it's at 110 and the premium is 11, okay, we'll five the right to buy at 100 can immediately sell at 110. That's going to have an intrinsic value of $10. The excess is one. If the stock price is at 100, I have the right to buy at 100. That's called an at the money option. These are in the money. And that premium is at three. Well, that doesn't have any intrinsic value. Doesn't have any exercise value. All of the premium is a decaying factor of $3. And if it's at 90, this is an out of the money option because it doesn't have any exercise value. If I can buy at 100 and the market is 90, the market price is way more favorable than that strike price. The agreed upon price and say the premium is about $1. Again, no exercise value, purely extrinsic value, which is going to decay as it gets closer to expiration or my deflate because a move happened and it's no longer anticipated. Because we purchased the right to buy, the higher the market price goes, the more valuable the option will be. Therefore, long calls on an individual basis are bullish. On the next video, I'm going to introduce you to the T chart. There's a method to my madness. We will get to the Greeks at some point. I promise. And here is the full board because you always ask.