{"id":257553,"date":"2026-09-28T14:35:35","date_gmt":"2026-09-28T18:35:35","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=257553"},"modified":"2026-09-28T14:35:37","modified_gmt":"2026-09-28T18:35:37","slug":"what-really-determines-the-price-of-an-option","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/ibkr-podcasts\/what-really-determines-the-price-of-an-option\/","title":{"rendered":"What Really Determines the Price of an Option?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">What really goes into the price of an option? Jeff Praissman and Mat Cashman of the Options Industry Council break down intrinsic and extrinsic value, implied volatility, time decay, delta, gamma, and the forces that can move an option\u2019s premium.<\/p>\n\n\n\n<figure class=\"wp-block-audio\"><audio controls src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2026\/09\/pod-20260921-occ_final_disclosures_mixdown-1.mp3\"><\/audio><\/figure>\n\n\n\n<h2 id=\"h-summary-ibkr-podcasts-ep-430\" class=\"wp-block-heading\">Summary \u2013 IBKR Podcasts Ep. 430<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><em>The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made<\/em>.<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Hi, everyone. This is Jeff Praissman from Interactive Brokers Podcast, and it&#8217;s my pleasure to welcome back to the IBKR Studio, from the OCC and the OIC, Mat Cashman. Hey, Mat, how are you?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">I am good. It&#8217;s wonderful to be back here again. We&#8217;re doing this on a monthly basis now, Jeff.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-0\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Oh, I love it. I love it, and I love talking options with you. And even before we get started today, for our listeners, to find more from Mat, you can go to theocc.com. You can also go to optionseducation.org, as well as on our website. Go to ibkr.com, click on Education. You can find lots of great past webinars, podcasts, articles.&nbsp;Mat&#8217;s a veteran of the industry and always has a lot of great input, and super happy to be collaborating with him.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-0\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">It&#8217;s great to be here again, Jeff. Let&#8217;s do this.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-1\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Right, let&#8217;s kick it off. And, you know, today we&#8217;re gonna talk about what are you actually paying for when you buy an option? So I wanna start with, Mat, a very basic question that probably has a more complicated answer than it sounds like it should.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-1\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">They always do. They always do, Jeff.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-2\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">But yeah, Mat, if I buy an option for $5, what exactly did I just pay $5 for?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-2\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Ah, that is a good question, and it does have a fairly, let&#8217;s call it a somewhat complicated answer. It&#8217;s a very simple question with a somewhat complicated answer. But it is the right question to ask because I think option premium, when people are using options and when they&#8217;re trading options, it looks like one number on the screen.&nbsp;But economically, it&#8217;s not really one thing only. It&#8217;s really like a bundle of different kinds of value and different kinds of risk. And part of that premium may kind of already exist because of where the stock is trading relative to the strike of the option that you&#8217;re looking at, and that&#8217;s what we call intrinsic value.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It&#8217;s hard to give it a different word other than intrinsic value because it&#8217;s kind of like intrinsically built into what the option is valued at. But the rest of it is what we call extrinsic value. It&#8217;s the value attached to what can kind of still happen between now and the time that the option expires.&nbsp;And that extrinsic piece of the value is shaped by lots of different forces, namely time to expiration, the implied volatility rate, interest rates, dividends, potential dividends, and the changing sensitivity of that option, of the price of the option itself relative to where the underlying is trading.&nbsp;So when I look at a $5 option, as you said, I don&#8217;t just see $5. I kinda wanna know what&#8217;s inside that $5.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-3\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And Mat, you just brought up two really important terms and features of options, intrinsic and extrinsic. And, you know, I think let&#8217;s start with intrinsic, &#8217;cause I think, quite honestly, it&#8217;s just simpler for people to understand, right? So what does intrinsic, in practical terms in our example, mean?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-3\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah, it&#8217;s a good place to start, and I agree with you. I think it is easier for people to understand in practical terms because it just kind of makes a little bit more sense to people. Intrinsic value is the part of that option premium that we were talking about that already exists because the option is usually in the money, right?&nbsp;So for instance, let&#8217;s talk about a 50 strike call with the stock trading 55. So the stock is trading above the strike of the option that you&#8217;re looking at, and it is a call, right? There&#8217;s already a $5 difference between where the stock is trading and where the strike of that option is. That call has $5 of intrinsic value in it.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Now, the option itself might be trading for something like six and a half dollars. But $5 of that premium is already what we just established as intrinsic value, and the remaining buck and a half of that would then be extrinsic value, right? That distinction is really useful because those two pieces of the premium behave somewhat differently.&nbsp;Intrinsic value is tied very directly to the underlying price because, remember when I said it&#8217;s because that option is already in the money by a certain amount, namely the intrinsic amount, and extrinsic value is tied to kind of like what could still happen between now and the time that the option expires.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-4\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">So Mat, the extrinsic value is basically the part that you&#8217;re paying for beyond the in-the-money amount, correct?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-4\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">That is essentially correct, yes. You can think about the intrinsic value as the amount that it&#8217;s already in the money, and the extrinsic value as the value of kind of possibility, right? Like, it&#8217;s the time that&#8217;s remaining, all of the potential movement that is forecasted between now and the time the option expires, potential changes in implied volatility, and potential changes in things like rates or dividends.&nbsp;It&#8217;s all of those things that can change between now and the time that the option expires, and that&#8217;s why things like out-of-the-money options that are completely out of the money can still have value even though they don&#8217;t have any intrinsic value at all. For instance, like when we&#8217;re talking about the 50 call with the stock trading 55, like we just referenced, that call is in the money by five bucks.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But if you look at the 60 strike call with the same stock trading 55, it&#8217;s fully out of the money, and it has no intrinsic value, but it still is trading for some amount of money. That entire premium is extrinsic. And so if you buy that option, what you&#8217;re paying for is entirely extrinsic value, and that&#8217;s basically like what could happen before the option expires, right?&nbsp;That&#8217;s what you&#8217;re paying for. You&#8217;re paying for possibility, is the way I like to think about it.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-5\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Right. So a couple things then, just to kind of recap for our listeners. An in-the-money call is gonna have intrinsic and extrinsic value. An out-of-the-money option is gonna only have extrinsic value up until the time it expires, whether or not that extrinsic value is like one-hundredth of a penny if it&#8217;s crazy out of the money and it&#8217;s, like, a minute left to expiration or whatever.&nbsp;But, like, so an option could have\u2014you know, will always have extrinsic value up until basically it expires worthless, and only in-the-money options have intrinsic value, and it&#8217;s only that amount between the difference between the stock price and the strike price.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-5\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yes, correct. And usually you can kind of think about it as the extrinsic value is the amount that the option is in the money at that point in time. But also I want you to remember, if the option is in the money, chances are it&#8217;s not just trading for its intrinsic value. It also has a certain amount of value that&#8217;s extrinsic, that&#8217;s kind of like built on top of it.&nbsp;Sometimes when you get closer to expiration, that extrinsic portion starts to become very, very small, and those options start to trade for what we call parity, right? That&#8217;s when those options are real close to expiration and they have only their extrinsic value or only their..<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-6\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Intrinsic value, right. And their intrinsic value is the value at expiration, essentially, between settlement and the strike.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-6\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Exactly.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-7\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">It seems like it&#8217;s a good way to look at it. Like, if you&#8217;re looking at option premium, should the listener kind of mentally split it into those two buckets, intrinsic and extrinsic?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-7\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">When I talk about option premium, I always kind of primarily break it down between those two things. It&#8217;s a useful starting point, right? Intrinsic value is what&#8217;s already there. Extrinsic value is what the market is assigning to that remaining amount of uncertainty that&#8217;s built in there.&nbsp;And I like to think of the Greeks, when we talk about the Greeks, as a dashboard for that bundle of risks. Delta is one of those Greeks, right? We talk about that all the time. That tells you how sensitive that option is to movement in the underlying. Gamma tells you how quickly that delta can change.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Remember, gamma is the rate of change of delta. Theta gives you a theoretical measure of time decay there. It tells you how much that thing should decay over a 24-hour period of time. And implied volatility tells you something about the volatility assumption that&#8217;s embedded in that option price. None of those metrics that I just talked about, none of those Greeks, are the premium all by itself, right?&nbsp;They are all ways to measure that premium, and they&#8217;re ways of understanding why that premium moves around and why it behaves the way that it does.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-8\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And, you know, Mat, you mentioned delta first. In other words, how can delta help you? How can it help explain what&#8217;s inside the option premium?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-8\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">What have you done for me lately? Yes. So delta&#8217;s really a good\u2014I like to think of delta as a useful bridge between the underlying and where the underlying is trading and the option. So at a basic level, delta is the expected change in the option&#8217;s price for a $1 move in the underlying if you keep everything else equal.&nbsp;But there&#8217;s another way to really think about it here, because as an option becomes deeper in the money, as that intrinsic portion of its value becomes bigger relative to its full value, and especially as we get closer to expiration, the price of that option, the behavior of that price, starts to look more and more like the underlying itself.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It gets closer and closer to moving one-to-one, what we call one-to-one, with the underlying. And that means that the delta of that option is getting closer and closer to 100, which is the total upper bound of the option&#8217;s delta. The delta can only get up to 100.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It&#8217;s the upper bound. So that&#8217;s a positive number for a call and a negative number for a put, because calls are positively correlated to underlying and puts are negatively correlated to underlying. So as you get closer to 100 of the delta, more of the option behaves like what I would call\u2014and I don&#8217;t think I made this term up, but it&#8217;s definitely something that you&#8217;re not gonna find in a lot of option textbooks..<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-9\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">You&#8217;re not gonna find it in Natenberg?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-9\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">It&#8217;s not in Natenberg. That&#8217;s the difference that I refer to as the difference between hard delta and soft delta. And as you get closer to 100, as far as delta is concerned, that option is starting to become more and more what I call hard delta. It&#8217;s the part of the option that is more directly tied to its intrinsic value.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-10\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And, you know, anyone who&#8217;s listened to your past podcasts or webinars has heard you mention hard delta and soft delta before. So maybe dive a little bit more into how they fit in here.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-10\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">I like to use those terms. I know I didn&#8217;t make them up, but they do get used somewhat when option traders are talking to each other, specifically about option positions that start to get kind of complicated. It&#8217;s easier to talk about things as hard delta and soft delta because they&#8217;re somewhat intuitive, right?&nbsp;Hard delta is a delta that tends to behave way more like the underlying itself. It&#8217;s almost like shares of stock, but it&#8217;s not, right? Stock is the purest example of hard delta, meaning one share of stock is one share of stock, and it behaves like one share of stock. That&#8217;s why its delta is one, right? But a deep in-the-money option, especially a deep in-the-money call close to expiration, can also behave very similar to the underlying because so much of its value is tied to the intrinsic portion of its total value.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So that means it&#8217;s got all hard delta and very little soft delta. But soft delta is different. Soft delta refers to all of those extrinsic portions of value that we were talking about before. An out-of-the-money option or an option with a lot of time remaining may have delta exposure, but that delta can be way less stable. It&#8217;s somewhat less stable because it&#8217;s not quite as tied to the underlying movement itself.&nbsp;There&#8217;s more extrinsic value involved in how that thing is moving around. There&#8217;s more time, there&#8217;s more volatility sensitivity, there&#8217;s more room for the option&#8217;s behavior to change. So when I look at option premium, the harder the delta becomes, the more of that option is beginning to behave like the intrinsic exposure.&nbsp;And the softer the delta is, the more important those extrinsic forces start to be, like movement in implied vol, time to expiration, decay, things of that nature start to become more important.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-11\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">So really, the more in the money and the closer to expiration, the quote-unquote &#8220;harder&#8221; the delta is. And whether it&#8217;s less in the money or out of the money and further from expiration, the quote-unquote &#8220;softer&#8221; the delta is.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-11\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yes, agreed. Especially, and I like to think about it especially when you&#8217;re talking about out-of-the-money options. I even refer to it not only as soft delta, but I call it like the squishy part of the option, right? It&#8217;s the part that can kind of get squished or can expand depending on things like implied volatility moving around, or different changes in rates and dividends and things like that, right?&nbsp;That&#8217;s really an important way to think about it.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-12\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And, you know, if we could kind of pause for a second and just kind of walk through an example for the listeners, &#8217;cause we&#8217;re gonna dive more into this, but I think even just kind of stepping to the side and explaining everything to them using an example is probably pretty helpful right now.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-12\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">That&#8217;s a good idea. Let&#8217;s go back to that 50 strike call that we were talking about with the stock trading 55, right? It&#8217;s trading $5 above the strike of the call. So suppose that call, just like I said, the full premium of the option is six and a half bucks. It&#8217;s trading for six and a half.&nbsp;Now, we know, because we&#8217;ve talked about intrinsic value, that $5 of the total premium of that option is its intrinsic value because the stock is $5 above the strike, right? Now, that leaves us a buck and a half of extrinsic value that&#8217;s still left in there, &#8217;cause remember, that option&#8217;s trading for six and a half bucks.&nbsp;Now, let&#8217;s think about what can happen to those two pieces individually, because if the stock moves from 55 up to 56, the intrinsic value of that call rises from $5 to $6, right? It&#8217;s just the difference between where the strike is and where the stock is. That part is pretty straightforward. But the extrinsic value, that buck and a half that we talked about was extrinsic, can move for totally different reasons.&nbsp;Maybe a day passes when the stock is moving from 55 to 56, and the theta pulls some of that value out, or maybe implied volatility changes, and it changes how much of that dollar and a half of extrinsic value is part of the option. Maybe the option gets closer to expiration, right? Like the day passing.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Maybe the delta changes as the stock moves, and it changes the extrinsic value. So the option premium can move for lots of different reasons, some of them that have nothing to do with a simple one-for-one change in the stock going from 55 up to 56. And so that&#8217;s important to think about those two things as moving somewhat differently when those things happen.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-13\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">That sounds like an answer to one of the questions a lot of newer option traders ask all the time, right? &#8220;Ah, stock moved my direction. Why didn&#8217;t my option, you know, make any money?&#8221;&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-13\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah. You&#8217;re not the only one that hears that question a lot, Jeff. That question gets asked an awful lot, and the answer is because being right about direction is only one part of the option trade. So talk about another example. Suppose you buy a call because you think the stock is going up, and the stock does go up, right?&nbsp;But between the time that you bought the call and the time that the stock went up, time passed while you waited or implied volatility levels fell while you waited. Maybe the move that you saw in the underlying up was smaller than the options market had already kind of priced in based on the price and the implied volatility of the option.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And maybe the option was far enough out of the money that its delta remained relatively low, even though the stock moved from, you know, 50 bucks up to 60 bucks. Maybe you were long the 70 call instead of the 50 call, right? That&#8217;s why I like to think about the full premium of the option as a bundle of risks.&nbsp;And when you buy an option or when you sell an option, you&#8217;re not just buying or selling direction alone. You&#8217;re buying or selling all of those other potential things that could move in the extrinsic portion of the option as well as the intrinsic portion.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-14\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And, you know, you&#8217;re talking about time, and I think besides, you know, delta\u2014I think delta is the most straightforward Greek to understand. But, you know, theta, I think theta&#8217;s pretty easy to understand as well. So how should someone think about the time component of what they&#8217;re paying for?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-14\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah. I agree. I think delta is usually probably the most intuitive thing, and theta is kind of like the secondary one because people always can relate to time passing, and that&#8217;s really what this is all about, and the idea of decay, right? Like we always talk about, if you leave a banana on your kitchen counter forever, it decays just like anything decays.&nbsp;When you buy an option, part of the extrinsic value is attached to the time that is remaining for something to potentially happen. So more time generally means more opportunity for the underlying to move, and that possibility of movement has to have some amount of nominal or notional value because the clock is kind of always running no matter what, right?&nbsp;And so theta is the metric we use to describe the theoretical 24-hour, one-day decay in an option value if you keep everything else equal. And the important part is the decay is not perfectly linear. If you&#8217;re talking about the decay of an option that has 30 days in it versus the decay of an option that has 30 minutes in it, it&#8217;s totally different.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And as expiration approaches, the character of that option changes and there&#8217;s less time for that uncertainty to actually play out, right? There&#8217;s less time for those things to happen. So if you&#8217;re paying for extrinsic value, one of the things you are paying for is time, and that time is continuously disappearing just like all of our times on this earth are continuously disappearing.&nbsp;Options are the exact same way, right?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-15\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">That was very deep, Mat.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-15\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Thank you. Thank you.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-16\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Implied volatility as an extrinsic value, right? So this is, in my opinion, really the reason that we have option trading because, right, intrinsic value is a set number. If the stock is trading at 60 and the strike is 55, it is $5.&nbsp;Doesn&#8217;t matter who&#8217;s trading it, that is the intrinsic value. Extrinsic value is sort of the, like you said, the squishy part, where, you know, that&#8217;s sort of where you get, I think something&#8217;s worth $1.25 in extrinsic value, and you think something&#8217;s worth $1.27. You know, you might buy it from me for $1.26, and I might sell it to you for $1.26 because it&#8217;s past my fair value.&nbsp;But implied volatility is such a big piece of this extrinsic value, right? So can you kind of dive into that for the listeners?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-16\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah, in many ways, it&#8217;s kind of the biggest piece, and I agree with you. The movement in implied volatility and thus the movement in price is so much of the reason why people want to trade options in the first place, right? Implied volatility is the volatility assumption that&#8217;s embedded in the market price of the option.&nbsp;So I always talk about implied vol and price as kind of tied commensurately with each other. It&#8217;s not something\u2014you can&#8217;t really move vol around without price moving around if you keep everything else equal. And so lower implied volatility generally means less value is being assigned by the market to that amount of uncertainty.&nbsp;So two otherwise similar options can have very different premiums because the market might be pricing very different volatility assumptions into each one of them. And this connects directly to the conversation we had last time about implied volatility as a number needing a little bit of context for people to understand what it means, right?&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Because the implied vol number, if you just look at it as a metric by itself, it doesn&#8217;t really tell you that much. But the important point is somewhat simpler. Implied volatility is one of the forces that are shaping the extrinsic portion of the premium that we&#8217;re talking about that people are paying for or selling to other people when they&#8217;re trading options.&nbsp;Implied vol is just one of those forces.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-17\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And, in reality, the same option could be worth very different amounts in different market environments, correct?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-17\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Oh, yes, absolutely. That is something that, I mean, you and I have both experienced firsthand, right? You&#8217;ve got a very similar option with two different sets of assumptions that completely change the price of that option. So if you take the same underlying price, the same strike, and the same amount of time remaining, the implied volatility environment changes meaningfully underneath the surface.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That option premium can change even if the stock price does not move at all, and that&#8217;s another one of those things that can surprise people. One of those questions we get all the time, like you said, is, &#8220;Hey, the stock went up. I bought calls, and they didn&#8217;t make money. What&#8217;s going on?&#8221; The other thing that we get as far as questions are concerned all the time is, like, nothing happened and the option itself changed price meaningfully, either up or down.&nbsp;And most of the time, people like to focus naturally on the stock price because that&#8217;s the most visible input here. But option prices can change because the market&#8217;s assumption about uncertainty, which is what the actual implied volatility number is, can change over time. And so you can have the same stock price and a very different option price if things like implied vol move substantially based on what the market is expecting for future movement.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-18\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And that&#8217;s what people mean when they&#8217;re talking about volatility regimes, correct?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-18\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah, more or less that&#8217;s what people are talking about when they&#8217;re saying this is a totally different vol regime. They&#8217;re talking about different market environments that mean different things as far as the uncertainty component is concerned, right? If people think there&#8217;s a lot of uncertainty out there, usually implied vols trade higher.&nbsp;So in quiet regimes where there&#8217;s not a lot going on, the market may be assigning relatively little premium to potential movement. But in more uncertain times, that extrinsic component can expand meaningfully, and the price of something like an at-the-money straddle can give you a really useful window into what the market is charging or thinking about for movement during that time period.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Again, that does not tell you whether the options are cheap or expensive. Back to the conversation we had in last month&#8217;s podcast. You need a framework to be able to evaluate that. But what it does tell you is what the current market is quote-unquote &#8220;charging&#8221; for uncertainty between now and the time that the option expires.&nbsp;And then you have to decide how that fits with the rest of your analysis as far as the price of the option is concerned.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-19\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">We&#8217;ve talked about a lot of the Greeks, right? We&#8217;ve talked about delta and theta and vol. We haven&#8217;t talked about gamma yet. So where does gamma fit into the price that someone&#8217;s paying for an option?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-19\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">This is a good one because gamma is the second derivative, right? It&#8217;s a Greek that measures another Greek, and it is also different because it measures more specifically how delta can change as the underlying moves. So the delta of your option changes because the gamma is acting on that delta. I sometimes describe gamma as the risk that your directional exposure itself might change between now and the time that the option expires.&nbsp;And that matters because the delta you buy today, the delta of the option that&#8217;s associated with the option you&#8217;re buying today, is not necessarily the delta that you will have tomorrow or the next day or the day after that, right? It&#8217;s a dynamic thing. Delta is dynamic, and things like at-the-money options can become in-the-money options very quickly because of where they are.&nbsp;And an out-of-the-money option can become far more directional as the stock moves up to or down to that strike that previously was out of the money that is now looking like it might be in the money, right? And so the gamma of that option is what&#8217;s changing the delta of that option. And so part of the value in an option is tied to this, what we call convexity.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The fact that its sensitivity to the underlying is, like I said, dynamic. It&#8217;s moving around, and that&#8217;s one of the characteristics that makes an option fundamentally different from owning stock or owning, you know, an underlying where it&#8217;s just straight delta.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-20\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">So Mat, going back to those two silos, you know, intrinsic, extrinsic, right? Intrinsic, again, that&#8217;s a set amount. That&#8217;s gonna be the difference between the stock price and the strike if it&#8217;s in the money. Extrinsic, now that&#8217;s where the rest becomes fun, right? You have all these factors, you know, coming into the extrinsic value, and they both combine to make the premium.&nbsp;So as we get closer to expiration, what is happening with that mix inside the premium, basically?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-20\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah. No, I love this concept because it really speaks to the idea that there are two kind of competing forces that are within the full premium of the option, and what you&#8217;re seeing as you get closer to expiration is the composition of the total premium starts to shift. It changes. And when I say it starts to shift or change, I mean that it changes between either extrinsic or intrinsic value.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Some of it might move into the extrinsic portion as time passes, some of it might move out and into the intrinsic portion, but the composition of it changes. So if an option is in the money, intrinsic value can become a larger percentage, a larger portion of the total premium as you get closer to expiration.&nbsp;And extrinsic value tends to decay as time runs out, as we get closer to expiry. And delta, in this case, can become a little bit harder, right? Not harder like harder to understand, but harder in terms of, like, much more acting like the underlying than it does for those extrinsic portions. It becomes more intrinsic.&nbsp;So gamma can also become more concentrated, especially when you&#8217;re talking about options that are near the money. And eventually, at expiration, every option has no extrinsic value left. That&#8217;s the important kind of endpoint that all these options have. At the moment of expiry, no option is going to have any extrinsic value left.&nbsp;Whatever premium remains at expiration is intrinsic value, and everything else that existed along the way\u2014time value, volatility value, the uncertainty\u2014all of that at that point has been resolved because the option has expired, and thus its extrinsic portion is now zero and its intrinsic portion is the only part that&#8217;s left.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-21\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">And this mixture, right? Does that explain why saying, you know, &#8220;this option&#8217;s cheaper than that option,&#8221; can be a little bit misleading, right?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-21\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Oh, absolutely. Yeah. It can be very misleading because one option might cost two bucks and another might cost eight bucks, but those prices can contain totally different mixtures of intrinsic and extrinsic value, right? The $8 option might have $6 of intrinsic value and only $2 of extrinsic value, and the $2 option might be totally out of the money and thus 100% of its value might be extrinsic.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And so the lower-priced option is not necessarily giving you less exposure or less risk. You have to know what&#8217;s inside that premium, and that&#8217;s the recurring theme here, is that there are competing forces within that premium, and it&#8217;s important for you to understand how much of it is intrinsic and how much of it is extrinsic.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-22\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Mat, this is a great conversation, but if you could, you know, kind of two-minute drill right here, right? Like, what are you looking for when you&#8217;re looking at option premium and whether or not you&#8217;re deciding whether to buy an option or not?&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Kind of what&#8217;s the takeaway?&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-22\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Yeah, I think that&#8217;s good. When I look at an option, the way that I&#8217;ve kind of learned how to do this is I&#8217;m looking at the option as a package, right? Like, number one is how much of the premium is already in that intrinsic value? How much of it is extrinsic?&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">That&#8217;s like step number one, is to be able to subset those two things out and look at that. And then you&#8217;re gonna wanna look at, like, okay, how much time is left, and what volatility assumption is embedded in that amount of time right now for this price? So time is going to affect the theta, and the vol is going to be commensurate with the price of that extrinsic portion of the option, right?&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And then you wanna look at things like how directional is this option right now? How much delta is there really in this, and how quickly can that directional exposure change? That&#8217;s gamma, right? That&#8217;s how much gamma this option has. And how directional it is, is like how much of this is built into the hard delta and how much of it is actually soft delta.&nbsp;Those are all the pieces that I wanna understand because the option price, the actual price that you&#8217;re looking at, that number on the screen, is the output, right? It&#8217;s the output of all of those things put together, and the interesting part for me is understanding the forces that have gone into creating that number.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">And that&#8217;ll give you a lot more information about how that option might move.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-jeff-praissman-23\" class=\"wp-block-heading\"><strong>Jeff Praissman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Mat, this has been great, as always. Find more from Mat, go to theocc.com or optionseducation.org. Go on our website, ibkr.com, click on Education, go to the Campus. Lots of great podcasts, articles from Mat Cashman at the OCC. Mat, until next month. Thank you.&nbsp;<\/p>\n\n\n\n<h3 id=\"h-mat-cashman-23\" class=\"wp-block-heading\"><strong>Mat Cashman<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">We&#8217;ll be back next month. Thanks for having me, Jeff.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-8f761849 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><strong>New to Interactive Brokers?<\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/ndcdyn.interactivebrokers.com\/Universal\/Application?utm_source=podJPAcc&amp;utm_ibsource=podJPAcc\" target=\"_blank\" rel=\"noreferrer noopener\">Open Account<\/a><\/div>\n<\/div>\n<\/div>\n<\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What really goes into the price of an option? Jeff Praissman and Mat Cashman of the Options Industry Council break down intrinsic and extrinsic value, implied volatility, time decay, delta, gamma, and the forces that can move an option\u2019s premium.<\/p>\n","protected":false},"author":914,"featured_media":257714,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[10842,13857],"tags":[3358,22057,1927,22216,6284,22221,47,7150,2099,1297,17708,22061,15383,22217,22220,19085,22218,1926,16071,22219,18241,22137,4574,7670,1928,8170,14728,860],"contributors-categories":[13576,13871],"class_list":["post-257553","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ibkr-podcasts","category-podcasts","tag-call-options","tag-calls-and-puts","tag-delta","tag-extrinsic-value","tag-gamma","tag-how-options-work","tag-ibkr","tag-implied-volatility","tag-interactive-brokers","tag-intrinsic-value","tag-jeff-praissman","tag-mat-cashman","tag-oic","tag-option-premium","tag-option-price","tag-option-pricing","tag-option-value","tag-options","tag-options-education","tag-options-explained","tag-options-greeks","tag-options-industry-council","tag-options-trading","tag-put-options","tag-theta","tag-time-decay","tag-trading-education","tag-volatility","contributors-categories-interactive-brokers","contributors-categories-the-options-industry-council-oic"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What Really Determines the Price of an Option?<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.com\/campus\/wp-json\/wp\/v2\/posts\/257553\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Really Determines the Price of an Option? | IBKR Campus US\" \/>\n<meta property=\"og:description\" content=\"What really goes into the price of an option? Jeff Praissman and Mat Cashman of the Options Industry Council break down intrinsic and extrinsic value, implied volatility, time decay, delta, gamma, and the forces that can move an option\u2019s premium.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/ibkr-podcasts\/what-really-determines-the-price-of-an-option\/\" \/>\n<meta property=\"og:site_name\" content=\"IBKR Campus US\" \/>\n<meta property=\"article:published_time\" content=\"2026-09-28T18:35:35+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-09-28T18:35:37+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2026\/09\/mat-cashman-concept.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1672\" \/>\n\t<meta property=\"og:image:height\" content=\"940\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Jeff Praissman\" 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