Unleaded Gas Option Price
The
futures unleaded gas price, and the unleaded gas 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 unleaded gas is trading at $1 a $0.90 call
option is $.10 in the money so the intrinsic value of the option is $4,200.
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.
Unleaded
gas option prices do not move in tandem with futures prices. A $.01 move in your favor in the unleaded gas futures markets
does not necessarily equal to a $.01 increase in the unleaded gas 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 unleaded gas call option has a delta of .5 and the price of the unleaded gas futures market
increases by $.01 the value of the option will increase by $.005 or $210.
If you are a speculator with a limited amount of risk capital then unleaded gas options may
be best way for you to invest in the unleaded gas market.
