At Contract Maturity, the Value of a Call Option is …
As a novice investor, you may have heard the term “call option” thrown around in financial circles, but were unsure of what it meant. A call option is a contract between two parties that gives the buyer the right, but not the obligation, to buy a specific stock at a predetermined price (strike price) within a particular time frame (expiration date). The seller, also known as the option writer, receives a premium for selling the call option.
At the contract`s maturity, which is the expiration date, the call option`s value depends on the stock`s price. If the stock`s current market price (spot price) is greater than the option`s strike price, the call option is in-the-money (ITM). The buyer can exercise their right to buy the stock at the lower strike price and sell it at the higher spot price, resulting in a profit. In contrast, if the spot price is less than the strike price, the call option is out-of-the-money (OTM), and the buyer would not exercise their option as it would result in a loss.
The value of the call option at maturity depends on the option`s intrinsic value (IV) and time value (TV). Intrinsic value is the difference between the stock`s spot price and the option`s strike price, and it indicates the option`s inherent value. Time value refers to the additional value the option has beyond its intrinsic value. It is primarily influenced by the stock`s volatility and the time remaining until expiration. The closer the expiration, the lower the time value.
If the call option is ITM, the buyer would receive a payout equal to the option`s intrinsic value. For example, suppose a buyer holds a call option for a stock with a strike price of $50 and a market price of $60 at expiration. In that case, the intrinsic value of the option is $10. If the buyer paid a premium of $2, their payout would be $8 ($10 – $2). If the option is OTM, it has no intrinsic value, and the buyer loses their premium payment.
In conclusion, at contract maturity, the value of a call option is dependent on the stock`s spot price, the option`s intrinsic value, and time value. Understanding the essential components that influence the call option`s value can help investors make informed decisions when dealing with options.