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Welcome to your source for answers to questions about option concepts, strategies, and terminology. A new question and answer is published each week. To view the Ask the Institute archives, click the "Ask the Institute Archive" link below.

Please note, questions WILL NOT be personally answered and may not be chosen for publication on the web site.

View the archive of all "Ask the Institute" questions.

 

This week's question:

DATE: October 17, 2014

QUESTION:

Can you explain what the real value and time value are of an option and how these two values are calculated?

ANSWER:
The real value of an option is the amount of money that an option owner would receive if, first, the option were exercised, and second, the resulting stock position was immediately closed. For Call options, real value is equal to the stock price minus the strike price of the Call. For example, if the stock price is $58 per share, then a 55-strike Call has real value of $3 per share. This can be calculated by using the $58 stock price minus the $55 strike price of the Call, which equals $3 of real value.

For Put options, real value is equal to the strike price of the put minus the stock price. For example, if the stock price is $94 per share, then a 95-strike Put has real value of $1 per share. This can be calculated by using the $95 strike price of the Put, minus the $94 stock price which equals $1 of real value.

To learn more about real value, time value, and how these two values are calculated, view this segment of "Ask the Institute."

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