Pork Bellies Option Price
The futures
pork bellies price, and the pork bellies 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 pork bellies is trading at $.90, a $.85 call option is $.05 in the money so the intrinsic value
of the option is $2,000.
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.
Pork bellies option prices do not move in tandem with futures prices. A $.01 move in your favor in
the pork bellies futures markets does not necessarily equal to a $.01 increase in the pork bellies 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 a pork bellies call option has a delta
of .5 and the price of the pork bellies futures market increases by $.01 the value of the option will increase by $.005 or
$200.00.
If you are a speculator with a limited amount of risk capital then pork
bellies options may be the best way for you to invest in the pork bellies market.
