Gasoline Option Price
The futures unleaded gas price,
and the unleaded gas 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.”
If unleaded gas is trading at $1 a $0.90 call option is $.10 in the money so the intrinsic value of
the option is $4,200.
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.
Unleaded gas option prices do not move in
tandem with futures prices. A $.01 move in your favor in the unleaded gas futures markets does not necessarily equal to a
$.01 increase in the unleaded gas 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.
If an unleaded gas call option has a delta of .5 and the price of the unleaded gas futures market increases
by $.01 the value of the option will increase by $.005 or $210.
If you are a
speculator with a limited amount of risk capital then unleaded gas options may be best way for you to invest in the unleaded