Theodore A. Andros and Joan B. Andros - Page 9

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               The price of an option, or its “premium”, is composed of two           
          elements:  The option’s “intrinsic value” and its “time value”.             
          For a call option, the intrinsic value of the option is the amount,         
          if any, by which the price of the underlying security exceeds the           
          option’s strike price.  The balance of the premium is the time              
          value of the option.  For a put option, the intrinsic value of the          
          option is the amount, if any, by which the strike price exceeds the         
          price of the security.                                                      
               Generally, an option’s price in the marketplace will be                
          greater than its intrinsic value.  The additional amount of premium         
          beyond the intrinsic value reflects that traders are willing to pay         
          the “time value” of money or the option’s “time premium”.  Market           
          participants are willing to pay this additional amount because of           
          the protective characteristics afforded by an option over an                
          outright long or short position in the underlying security.                 
               An option is “in the money” when the option’s strike price is          
          less than the current market price of the underlying instrument;            
          i.e., when it would be economically favorable for the option holder         
          to exercise the option. An option is “out of the money” when it             
          would be economically unfavorable to exercise the option.  When the         
          option strike price equals the market price of the underlying               
          security, an option is “at the money”.                                      
               In the futures market, a “spread” consists of the simultaneous         
          establishment of two opposite positions for delivery of the same            






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Last modified: May 25, 2011