February Webinar Key Takeaways: Understanding Options Premium and Structural Pricing

In February, OIC instructor Mat Cashman led two webinars: Options Premium: Intrinsic, Extrinsic and the Forces That Shape Value and Pricing Models and Put–Call Parity: How Theory Shapes Option Values. These sessions moved beyond basic terminology and focused on how options are actually priced, how premium behaves over time, and why structural relationships keep markets aligned.

Together, the webinars explained what makes up an option’s premium and how those components behave and may vary across strikes and expirations.

What We Covered:

Options Premium as a Bundle of Risks

Option premium reflects exposure to multiple risk dimensions:

• Movement in the underlying (Delta and Gamma)
• Time decay (Theta)
• Implied volatility (market expectations of future underlying price movement)
• Interest rates and dividends (carry)

Intrinsic value represents the option’s inherent value based purely on stock price versus strike price, while extrinsic value represents time and uncertainty.

Delta as the Bridge Between Intrinsic and Extrinsic Value

Delta measures how much an option’s price is expected to change for a $1 move in the underlying.

• Higher Delta options behave more like stock and are increasingly driven by intrinsic value.
• Lower Delta options are more influenced by extrinsic forces such as time and volatility.
• The distinction between “hard” Delta (higher correlation to intrinsic value) and “soft” Delta (greater sensitivity to extrinsic inputs) provides a practical framework for understanding risk behavior.

Time Decay and Extrinsic Value

Extrinsic value erodes over time.

• Theta measures expected daily decay, calculated on a calendar-day basis.
• Decay accelerates as expiration approaches.
• Call and put prices both experience negative Theta.
• Even if the stock price does not move, the passage of time alone can potentially reduce extrinsic value.

Implied Volatility and Market Expectations

Implied volatility represents the marketplace’s forward-looking expectation of future stock movement.

• It is not historical volatility.
• It is determined collectively by buyers and sellers in the options market.
• Higher implied volatility increases both call and put premiums.
• Lower implied volatility reduces both.
• Options can change in value even if the stock remains unchanged, purely due to shifts in volatility assumptions.

Put–Call Parity and Structural Relationships

Put–Call parity links calls, puts, and stock in a mathematical relationship that enforces pricing consistency.

• The extrinsic value of in-the-money options aligns with the extrinsic value of corresponding out-of-the-money options at the same strike price.
• Differences between call and put prices reveal the market’s implied forward price of the underlying.
• Pricing models can be used to analyze consistency across strikes and expirations by incorporating volatility, time, interest rates, and dividends.
• Understanding parity helps explain why option markets maintain structural efficiency.

Conversions, Reversals, and Synthetic Positions

Options can replicate stock positions synthetically:

• Long call + short put (same strike and month) = synthetic long stock
• Short call + long put (same strike and month) = synthetic short stock

Conversions and reversals are not directional trades. They are structural trades that capture differences between synthetic exposure and physical stock, often influenced by carry costs and dividend expectations.

Key Structural Insights

• Options premium reflects multiple interacting forces.
• Intrinsic value is mechanical; extrinsic value is dynamic.
• Time decay works continuously.
• Implied volatility prices uncertainty.
• Structural relationships such as parity maintain alignment across the market.
• “Delta neutral” does not mean risk neutral; assignment, financing, and carry still matter.

Keep Learning:

Key Moments from Options Premium: Intrinsic, Extrinsic and the Forces That Shape Value
Key Moments from Pricing Models and Put–Call Parity: How Theory Shapes Option Values

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