InvestorQ : Is there a relation between calculation of intrinsic value and your application in trading strategy?
Mahima Roy made post

Is there a relation between calculation of intrinsic value and your application in trading strategy?

Answer
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Aditi Sharma answered.
2 years ago


Let us look at the 3 basic rules to apply the concept of intrinsic value while trading:

Options that have a very high proportion of intrinsic value are almost akin to trading futures. In that case you can take a call whether you want to trade in a wasting asset or in a futures contract which can be rolled over.

Options with low intrinsic value and higher time value will have a larger propensity to see value shifts when the volatility in the market changes. That is because time value is more susceptible to changes in volatility.

When you pay the option price while buying options, split the price into intrinsic value and time value. Then you get an idea how much you are paying for embedded value and how much you are paying for future expectations of price movement.