Episode Summary

This episode breaks down the five key inputs that determine an option's premium: the underlying price, the strike price, time to expiry, interest rates, and expected volatility. We split an option's price into its two core components: intrinsic value, which represents what the option would be worth if it expired immediately, and time value, which represents the premium paid for future possibility. We explore why time decay is a continuous, accelerating cost that option buyers pay every single day, meaning you can easily lose money by being right too slowly.

We also demystify expected volatility, explaining why larger price fluctuations increase the value of both calls and puts due to their capped downside and asymmetric upside. Finally, we analyze the  ...