What is Option Valuation?

–          As long as there is some chance that an option could have some exercise value prior to expiration, the at the money option would sell for a price greater than zero.

–          The same argument would apply to out of the money options, though the market price is likely to be lower since the underlying security must increase more in value.

–          In the money options also sell for more than their exercise value as the holder stands to gain at exerciser the benefit of possible interim increases in underlying asset or security value, but is not at risk for all possible reductions in underlying asset value.

–          Therefore option market value is always above exercise value. The amount by which is called the option premium.