Options Education: Replying to Questions

Today’s post continues the discussion of what is necessary for an options education to be useful for the student.

There are many questions I can use as an example, but I’ll choose a very recent submission.

Sally asked:

Can you explain how to calculate intrinsic value? How do you calculate time value and can time value be used in at the money and out of the money? Thank you.

Complete answer. But is it good enough?

The intrinsic value is the amount by which an option is in the money.
The time value is the portion of the option premium that is not intrinsic value.
Yes, at-the-money and out-of-the-money options have time value.

The information is correct. It is complete and answers the question. However, from my perspective this is not the question of an experienced trader. Therefore, there is the possibility that even the term ‘in the money’ may not be clearly understood. If taking the time to reply, shouldn’t the response satisfy the needs of the questioner? I believe so – the questioner’s needs come first.

Moving beyond that simple point, I know that an options education must fit the needs of the student. I get the feeling that too many ‘teachers’ are so full of themselves that the goal is to show students how smart they are, rather than fulfill the needs of the students. I believe in doing whatever it takes to help each individual learn the lesson. I believe that options are not for everyone. Some people lack the necessary skills or personality traits, or expect learning to be a cinch. It is easy for some, but most people must put in time and effort to find success as a trader.

Sufficient answer. Is it too much

I try to place myself in the position of the person asking the question and believe it’s better to assume less knowledge, rather than more.

I offered the following reply to the same question:

Sally,

The intrinsic value of an option is calculated with a simple subtraction:

Call option: Stock price minus strike price = intrinsic value

Put option: Strike price minus stock price = intrinsic value.

If the result is zero, or negative, then the option has NO intrinsic value.

    Example 1:

    Stock is 34.

    The 30 call has an intrinsic value of 4 points or $400.
    The 25 call has an intrinsic value of $900.

The expiration date is not involved. All calls with a given strike price (on same underlying) have the same intrinsic value, regardless of expiration date.

Example2:

Stock is 87.

The 90 put has an intrinsic value of 3 points or $300.

Time value = option price (the premium) minus intrinsic value

may consist of 100% intrinsic value with zero time value

Sufficient rocks

I don’t believe it can be wrong to supply the sufficient answer. If the person asking the question does not need all information, there is no harm done. However, others may eventually read the question and answer. For them, the reply must be sufficient. I am not recommending a complete reply, I am not suggesting that a tome be written.

There is no excuse for lazy answers. And this especially applies to those who take money from people in exchange for an education.

I believe a ‘graduate’ should:

  • Know how to make trade decisions – especially when under pressure
  • Understand the importance of risk management and position sizing (you cannot survive without them)
  • Be encouraged to return at any time, to ask additional questions.

And I do this at a price that should be much higher. Not just because it’s a bargain, but the low price incorrectly suggests that it’s not a high quality education.

Newcomers to the options universe are accustomed to paying thousands of dollars for 2-day classes. The possibility of spending a few hundred for a full year’s worth of quality lessons and discussion does not seem believable. But it is.

Take a look at Options for Rookie’s Premium. I offer a full refund within the first 30 days. Cost: $37/month.

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