Yesterday, we kicked off the Options Crash Course, by building the foundation that serves as the source to all option strategies - the option contract. Well in that piece, we learned that the only floating variable that is pertinent to the option contract is its price, and today, we want to dive deeper into that price to uncover its inner workings.

To do that, we start with the governor to all things option pricing: the Black-Scholes Option Pricing Model. In working through a basic overview of this model, we learn that option pricing is dependent on six different factors, all of which work together to build the probabilistic function that is the BSM. Then, we break option prices down into their two component parts: intrinsic value and extrinsic value. While intrinsic value measures the inherent worth of the option, extrinsic value represents the added “premium” that is tacked on to establish the option’s price.

LINKS TO ALL CRASH COURSE EPISODES:

Ep #1: The Source of all Strategies

Ep #2: Deconstructing Option Prices

Ep #3: Extrinsic Value Extras

Ep #4: Profit, Direction, and Probability

Ep #5: The Natural Decay of Options

Ep #6: Trading Changes in Implied Volatility

Ep #7: Gamma: Sign, Magnitude, and Risk

Ep #8: Contracts, Decay, and IV Overstatement

Ep #9: Defined-Risk Strategies: Part One

Ep #10: Defined-Risk Strategies: Part Two

Ep #11: Undefined-Risk Strategies: Part One

Ep #12: Undefined-Risk Strategies: Part Two

Ep #13: Managing Winners, Losers, and Rolling

Ep #14: Directional Bias at the Portfolio Level

Ep #15: Positive Theta at the Portfolio Level

Ep #16: Putting it all Together: Trade Entry and Exit

Ep #17: Putting it all Together: Trade Management

Watch the second season on Strategy Management!