Silver 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 silver is trading at $9.50, a $9.20
call option is $.30 in the money so the intrinsic value of the option is $1,500.
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 that an option has, the more extrinsic value it has. As an option
approaches its expiration date, it looses 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.
Silver option prices
do not move in tandem with futures prices. A $.01 move in your favor in the silver futures market does not necessarily equal
to a $.01 increase in the silver 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 silver call option has a delta of .5 and the price of the silver futures market increases by
$.01 the value of the option will increase by $.005 or $25.
