what the intrinsic value is?

[quote="paid2trade"]This is a very good question received from a seekingalpha reader of an article I wrote.

When you write "sell the October $42.50 strike call for $1.13 over the intrinsic value" why don't you provide that number? Are you leaving it up to the reader to decide what the intrinsic value is?[/quote]

Options are made up from two values, the time value and the intrinsic value.

All in the money options have intrinsic value and all out of the money have zero intrinsic value. The intrinsic value is the amount that the option is IN the money. For example, if a call option has a strike price of $100 and the underlying is trading for $110, the option has an intrinsic value of $10.00 REGARDLESS of what the option is actually trading for (it could have a bid for less, the same, or more than the intrinsic value depending on the liquidity of the option and how much time to expiration)

The time value of an option is anything above the intrinsic value. The time value is made up of many components, including the expected volatility, supply and demand of the option (very similar to implied volatility and the terms are often used interchangeably) at any given moment, interest rates, time to expiration, dividends expected during the option life, cost to borrow shares to short sell if applicable (part of supply and demand but knowing this can help calculate the true value).

An example of the time value of an option is a call option that has a strike price of $100 and the underlying is currently trading at $100, and the option is trading at $10. This option would then have a zero intrinsic value but a time value of $10

Without knowing what the price of the stock is at the time you read the article I do not know what the intrinsic value is. As the price of the stock moves higher or lower the intrinsic value changes. Also, as the price of the stock moves up and down, the best strike price may change. This leaves several variables that are impossible to predict open. I can therefor only write about what I would do at the moment I write the article.

As you can see though, the intrinsic value is easy to calculate ( I do it so often that I can do it in my head than on a calculator or spreadsheet). More importantly, is that my articles on dividend capture are far from being everything an investor would need to know to maximize the return.

Thanks for your question