in the market when one of two things happens: when their long option goes up in value, or their short option goes down in value. See the Intrinsic, Extrinsic, and Theta values. At expiration, all options in the expiration month, calls and puts, in-the-money and out-of-the-money must be completely devoid of extrinsic value as noted in the time value decay charts below. The remaining amount, which is about.10, is the extrinsic value.
Thats when you need implied volatility and the stock price to change. In other words, an option premium that is not intrinsic value will decline at an increasing rate as expiration nears. Break out the option time decay calculator! Pay attention when youre buying an option! Investopedia defines time decay as the ratio of the change in an options price to the decrease in time to expiration. For example, in figure 1, the 22-strike call, with the stock.07, the intrinsic value.07. There are 4 Greeks known as Delta, Vega, Gamma and Theta. Out of the money options are typically the options expiring worthless.
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