Everything you need to know about option prices

Over on our WhatsApp community a fellow member asked a very pertinent question about how to read option prices during expiry. Specifically, why would the actual intrinsic price of the option be different from the theoretical price?

Now before we discuss this rather complex question, let me simplify a few basic terms on options:

Objective of this article:

• In this article, I start by explaining what do we mean by intrinsic and extrinsic price of an option.

• After that I discuss each factor that impacts the extrinsic price of an option.

• I also discuss how and why the extrinsic price of an option nearing expiry approaches zero.

• And finally, I explain why even though the extrinsic price approaches zero, the actual intrinsic price you would notice on Zerodha may be different from the theoretical price of the option.

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