How to determine the value of an option?
First you need to understand what is meant by intrinsic and extrinsic. The premium option is made in the same amounts. Intrinsic is the amount of the option if you use it in the futures contract and then offset it. For example if you have a November $ 5 soybean call and the future price for that contract is $ 5.20 then there is a .20 intrinsic value for that option. Soybeans are a 5000 bushel contract so 20 cents multiplied by 5000 = $ 1000 intrinsic value for that option.
Now let’s say the same $ 5 November soy call costs a $ 1600 premium. $ 1000 in cost is intrinsic amount and the other $ 600 is extrinsic. Extrinsic value consists of the amount of time, premium conversion and demand for the specific option. If the option has 60 days left until its expiration there is a higher amount of time than the remaining 45 days. If the market has multiple price movements from low to high the premium is sadly higher than a small market price movement. If more people buy at the exact strike price, that demand can artificially push up the premium as well.
How much is a premium option to move in relation to the underlying futures contract?
You can find out by finding the cause of the delta of your choice. The delta factor tells you how much of the premium change will occur in your option in line with the underlying movement in the future contract. Let’s say you think gold in December will rise to $ 50 / ounce or $ 5000 / contract by the end of expiration. You buy an option with a .20 or 20% delta factor. This option should get $ approximately $ 1000 in premium value of $ 5000 expected to move the price of gold futures.
Can an income be an option thinker before the option has a natural value?
Yes, as long as the premium option adds enough to cover your transaction costs such as commissions and fees. For example, you have a corn call of $ 3 in December and corn in December at $ 270 / bushel and your transaction costs $ 50. Let’s say your option has a 20% delta and the market in the coming December corn will increase by 10 cents / bushel to $ 2.80 / bushel. Corn is a contact of 5000 bushels so 1 cent multiplied by 5000 = $ 50. Your option premium will increase by approximately 2 cents = $ 100. Your rest is even $ 50 so you have $ 50 income without any intrinsic value because you don’t even have 20 centavos money.
Futures and options investing are very risky and only risky is the capital that needs to be used. Past performance does not reflect future consequences. Cash, options and futures do not have to respond to the same stimulus in the same way. There is no guarantee of good trade.