🔴 The Stock Market Crash 2020 – Day 43 | What Is Option Premium?

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The Stock Market Crash 2020 – Day 43 | April 23, 2020

So what exactly is option premium? You may have heard me talk about selling options for premium, or collecting premium lately and it all means the same things really. Option premium is the money (or referred to as the credit) the options writer/seller receives for selling the option.

Option premium can be easily thought of like really anything you sell, whether that’s put options or pineapples. The person selling the option is collecting a premium on top of the intrinsic(real) value the option has…it’s really as simple as that.

Let’s take a look at a specific example using Virgin Galactic (SPCE) since at the time of this video I currently have a position in it:

Right now the current price of SPCE stock is at $16.65/share

We’ll first start with Call Options and we’ll be discussing the $18 call option strike along with the $15 call option strike, basically straddling the current price of the stock.

If I buyer were to come in with the SPCE trading at $16.65 and bought the $18 Call, that option has zero intrinsic value.

Now on the opposite side, the $15 call option does in fact have $1.65 of intrinsic value with the current price of SPCE stock at $16.65.

Now this $15 call option costs, $3.00 to purchase…so where does this extra $1.35 come in?

This is the “Time Value” or premium in the options.

Now let’s look at an example with put options.

One again we’ll use SPCE stock in our example, still trading at $16.65 and we’re looking at the $18 put option along with the $13 put option.

When you’re buying put option you make money when the price of the underlying stock/asset moves lower. So in this example the $18 put is selling for $3.35 per contract. With $1.35 of intrinsic (or real) value it has $2.00 of time value.

And now once again on the opposite side, the $13 put has no value and is totally made up of extrinsic value. The $13 put is currently selling for $0.75, which is all time value.

So now let’s put it altogether. So when you are on the opposite side of the trade as the options seller, you are collecting the option premium which is made up of the time value and some of the intrinsic value of the option.

If this is making sense, I would really appreciate if you take a second to like this video 😉

So when the stock market becomes volatile like we’ve seen since the recent 2020 crash, the price of options increase. This has to do with what is called “Implied Volatility.” Which is exactly what it sounds like, a rating of how volatile the price of the underlying stock may be over a given period of time.

And as you’ve seen with things like the price of crude oil plummeting below zero the other day…the stock market is still incredibly volatile making it a great environment for selling option premium.

I hope this helps!
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Comments

dan hug hes says:

Markus. So you a Put SELLER of SPCE ??? Thanks. Seller. Buy when spce drops a little lower , trust comes back up by DTE. Going to use a demo account and use a sell on a stock I don’t mind owning.

dan hug hes says:

Markus. I’m a Brit. I’m using a broker for Stocks. Spreads and CFDs. CFDs have a tax or irs wrapper. In UK Spreads are tax free. However I’m new to put options. I’m lost looking at your options and your 30c examples. Are you shopping around different brokers for the 15-40c aim or just one broker with a list of offers. !????? Thanks

john bassett says:

Thanks Markus.

john bassett says:

I thought the Option Premium training was run through too quickly to be able to properly understand the theory.

Steven M. says:

Just purchased both the Power X Strategy and The Simple Strategy books from Amazon. Look forward to reading through what you have been speaking much about.

Marlene Wright says:

I finished all the lessons of The Power X and open a simulator account to practice. Yes my husband and I love the free demo with Paul and you have a great support people, easy access. They look after us very well. Thank you.

Marlene Wright says:

Yes. That makes sense now Thanks Markus.

Edward Elster says:

great session. Also, I ordered the mug today.

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