Options Trading Tutorial

Option Pricing for Citi?

I am new to options trading so I don't know if I can explain what I am trying to figure out clearly. But any inputs would be much appreciated. When I checked during closing last Friday: C = 3.04 May C 3 Call was worth 0.41 I figured if you take the .04 of intrinsic value that would leave 0.37 of time value for this call. (0.41-0.04=0.37) However, as of closing today. C=3.8 May C 3 Call is now at 0.95 Again, I subtract the 0.8 intrinsic value from the premium we and are left with 0.15 of time value....(0.95-0.8=0.15) Does this mean that the time value has just depreciated by over 50% during the course of today's trading? Is it normal for an option to lose over 50% of time value during the course of three days?

Public Comments

1. I am afraid that the option can lose 50% in hours and move up 70% also - You are playing with fire my friend - These formulas sometime mean nothing to me - All I am interested in is: Buy price is X Strike price is X ++ - Profit... ? - As long as there is profit and the strike price is higher than the buy price, I am in - Made a lot and lost a lot !
2. Yes. It is also possible for it to increase as wildly. In general, the deeper in the money, the smaller the time value. Also, the more volatile the stock, the larger the time value. You could have made a similar observation about the intrinsic value, too. In essence, options are highly leveraged instruments. In addition, there is a time decay factor (called "theta") which shows how time value decays with passage of time. HTH. There are nearly infinite many websites that deal with this subject and you can pick and choose depending upon your level of understanding and the depth you want to go in.
3. I agree, in part, with the other answer here. Formula's in trading are relative, esp. from the little guys POV. You can bet that several billion dollars worth of computing power are crunching every known financial formula 6 ways to Sunday every open trading hour and exploiting each profit window they find...however, that is the bailiwick of the big boys. On the other hand, to expect that any particular calculation of any particular financial transaction to be a RATIONAL expression of a theoretical formula will drive you to madness. Many financial transactions, esp. those involving the gambling public, are highly irrational. Also keep in mind that however brilliant those beautiful options formulas are, some of the minds behind them have gone bankrupt trying to manage real money (nearly bought the entire financial system down with them once and contributed to the actual downfall...if you throw in the more general exotic derivatives market that existed until last year).
4. <<<Does this mean that the time value has just depreciated by over 50% during the course of today's trading?>>> Extrinsic (time) value depreciated by over 50% over a three day weekend plus today's trading. (Remember the market was closed on Friday.) <<<Is it normal for an option to lose over 50% of time value during the course of three days?>>> It depends on a lot of factors, but when a stock price moves 25% from the close of one session to the close of the next session I think you would see the more than a 50% change in extrinsic value quite often.