Option Moneyness (ITM/ATM/OTM), Intrinsic Value & Put-Call Parity

Decomposing option premium into Intrinsic and Extrinsic (Time) value and mastering Put-Call Parity (`C - P = F - K·e^-rt`). Within the Futures & Options curriculum (Options Mechanics & Greeks → Pricing & Moneyness), this topic establishes the concrete quantitative rules and execution mechanics required for live market deployment.

Professional desks never rely on ambiguous visual guesses for options. Instead, every entry, invalidation level, and risk parameter is defined mathematically before a single order reaches the exchange gateway.

Hover over key terms below for instant definitions: Options, Intrinsic Value, and Extrinsic Value. For the complete mathematical derivation and edge-case analysis, open worked example & quantitative lookup matrix for call put intrinsic time value.

• Options — Core structural driver governing option moneyness (itm/atm/otm), intrinsic value & put-call parity.
• Intrinsic Value — Prevents premature entries and enforces mechanical discipline across Pricing & Moneyness.
• Extrinsic Value — Ensures worst-case scenario losses stay strictly within predetermined R-multiple budgets.

1. 1
   1. Pre-Session Calibration & Regime Check

   Measure baseline volatility and liquidity parameters for options prior to market open.
2. 2
   2. Mechanical Signal Confirmation

   Wait for a completed bar close confirming the intrinsic value threshold—never pre-empt mid-candle.
3. 3
   3. Risk-Normalized Sizing & Order Placement

   Compute exact lot quantity from the invalidation distance and dispatch via a Marketable Limit order.
4. 4
   4. Post-Trade Telemetry & Audit

   Log arrival price, fill slippage, and MAE/MFE metrics against the Pricing & Moneyness benchmark.

Implementation & Quantitative Model

1export function decomposeCall(spot: number, strike: number, callPrem: number) {2  const intrinsic = Math.max(0, spot - strike);3  const extrinsic = Math.max(0, callPrem - intrinsic);4  return { intrinsic, extrinsic };5}

Cross-reference standard risk definitions such as drawdown, slippage, and Sharpe ratio when auditing your logs.