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The futures S&P 500 Index price
and the S&P 500 Index option price is not the same thing. Option price valuation is not as straightforward as futures
valuation. Option premium is comprised of intrinsic value and extrinsic value.
An option has intrinsic value if the market is trading
above the strike price of a call option, or below the strike price of a put option. If an option contract has intrinsic value
it is called “in the money.” If an option contract does not have intrinsic value it is called “out of the
money.”
For example:
If the S&P 500 Index is trading at 730, a 700 call option is 30 points in the
money so the intrinsic value of the option is $7,500 (30 x $250).
The extrinsic value of the option is its “time
value.” Extrinsic value takes into account the possibility that an option may go in the money by expiration. The more
time that an option has the more extrinsic value it has. As an option approaches its expiration date it loses value. This
is called time decay. At expiration an option has no extrinsic value so if the option is out of the money it expires worthless.
S&P
500 Index option prices do not move in tandem with futures prices. A 1 point move in your favor in the S&P 500 Index futures
markets does not necessarily equal to a 1 point increase in the S&P 500 Index option value. The amount that an option
value will increase based upon an increase in its futures price is called its delta. Call option deltas are measures from
0 to 1. As an option goes from “out of the money” to “in the money” its delta increases.
For example:
If
an S&P 500 Index call option has a delta of .5 and the price of the S&P 500 Index futures market increases by 1 point,
the value of the option will increase by 0.5 points or $125.00 (.5 X $250).
If you are a speculator with a limited amount of risk
capital then S&P 500 Index options may be best way for you to invest in the S&P 500 Index market.
Click
here to view the current price of S&P 500
Index options.
Click here to contact a commodities broker with experience in the S&P 500 Index market.
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