Copper Option Price
Option valuations are not as straightforward as futures valuation.
Option premiums are comprised of intrinsic value and extrinsic value.
An
option has intrinsic value if the market is trading above the strike price of a call option, or below the strike price of
a put option. If an option contract has intrinsic value it is called “in the money.” If an option contract does
not have intrinsic value it is called “out of the money.”
For example:
If copper is trading at $2.00, a $1.90 call option is $.10 in the money so the intrinsic value of
the option is $2,500.
The extrinsic value of the option is its “time
value.” Extrinsic value takes into account the possibility that an option may go in the money by expiration. The more
time an option has the more extrinsic value it has. As an option approaches its expiration date, it loses value. This is called
time decay. At expiration an option has no extrinsic value so if the option is out of the money it expires worthless.
Copper option prices do not move in tandem with futures prices. A $.01 move in your favor
in the copper futures market does not necessarily equal to a $.01 increase in the copper option value. The amount that an
option value will increase based upon an increase in its futures price is called its delta. Call option deltas are measures
from 0 to 1. As an option goes from “out of the money” to “in the money” its delta increases.
For example:
If a copper call option has a delta of .5 and the
price of the copper futures market increases by $.01 the value of the option will increase by $0.005 or $125.
