basic question: look at the option-payoff/asset-price curve of a call option. It's flat till X then it rises linearly with asset price. But in-the-money and out-of-the-money options both have some fluctuating value. timeValue is alwyas positive, even with $0 intrinsicVal (out of the money). Why?

A: an out-of-the-money call has $0 valuation only on the expiry date or 0 volatility. Before expiry, it has a non-zero chance (due to vol) to become in-the-money. It has a non-zero valuation.

Imagine someone selling a deep out-of-the-money eurodollar call optoin (op on futures) with K=5000 bps/yr. K is too high, but what if the option premium is $0 ie free? I would "buy" it since there's some chance eurodollar futures contract price (expressed in bps) may escalate to that level.

## Friday, March 4, 2011

### option valuation is never $0 (due to time-value and vol)

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