# How do product options work?

How to determine the value of an option?

First you need to understand the meaning of internal and external. Alternative premiums consist of both of these values. Unique is the value of the option if you apply it to a futures contract and then offset it. For example if you have a \$ 5 soybean call for November and the futures price of that deal is 20 5.20, then there is a .20 distinct value for that option. Soybeans are a 5000 bushel deal so 20 cents for this option is multiplied by the internal value of 5000 = \$ 1000.

Now letâ€™s talk about that same 5th November dollar y 1600 premium soybean call price. The cost of \$ 1000 is the internal value and the other \$ 600 is the external. Extrinsic value consists of time value, volatility premium and demand for that particular option. If the option has left0 days left until the expiration date, it is worth more than the remaining 45 days. If there is less price movement than the price in the market, the volatility premium will be higher than in a small price movement market. If many people have bought the strike price, then that demand can artificially push the premium forward.

How much will the premium of any option related to the underlying futures contract be transferred?

You can discover this by looking at the delta factor of your option. Delta Factor lets you know how much the premium in your option will change based on the underlying futures contract movement. Suppose you think that gold will go up by \$ 50 / ounce or 000 5000 / contract by the end of December. You bought an option with a .20 or 20% delta factor. This option should gain approximately value 1000 as the premium value of the expected gold 5000 gold futures price movement.

Can an alternative speculator have any benefit before the internal value of the alternative?

Yes, as long as the option premium is high enough to cover your transaction costs such as commissions and fees. For example, you had a Dec 3 December Corn Call and December Corn \$ 270 / bushel and your transaction cost was \$ 50. Let’s say your option has 20% delta and the December corn futures market goes above 10 cents / bushel \$ 2.80 / bushel. Corn is a 5000 bushel contact so multiplied by 1% 5000 = \$ 50. Your option premium will increase by about 2 cents = 100. Your break was even 50 so you have a \$ 50 profit without any internal value because you are still out of money by 20 cents.

Futures and alternative investments are very risky and only risk capital should be used. Past performance is not indicative of future results. Cash, options and futures do not necessarily respond to similar stimuli in the same way. There is no guaranteed good trade.