Who Keeps the Extrinsic Value if an option expires worthless?

Discussion in 'Ask any question!' started by Russell McEacharn, Oct 21, 2021.

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  1. Russell McEacharn

    Russell McEacharn New Member

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    Here's an Example:
    TSLA - Strike $850 - Ask Price for 1 Option contract $26.95 - Exp 10/22
    Extrinsic Value $19.95
    Intrinsic Value $7.00

    Buyer spends $2,695 for the contract
    Seller collects $700

    Option expires worthless, Seller made $700, Buyer Lost $2695.

    Where does the missing $1,995 go?

    Thanks!
     
  2. Russell McEacharn

    Russell McEacharn New Member

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    On the opposite end of that spectrum, if the option expires In the Money.

    Buyer spends $2,695 for the contract
    Seller collects $700

    Option expires in the money, lets say seller makes $305 bucks, (2,695 + 300 = $3,000)

    There is a deficit of $305 (extrinsic) that the buyer made

    Does the financial institution take the $305 Extrinsic value hit, or is that placed on the seller?

    The reason i ask this is because...
    In my first example above, it appears the financial institution seems to profit a great amount by taking the 100% of the extrinsic value as profit when an option expires worthless... While putting the responsibility on the seller of the contract when the option expires in the money.

    Is this accurate? it can't be accurate... Please provide detailed breakdown.

    Thanks,
     
  3. StockJock-e

    StockJock-e Brew Master
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    Nope.

    There lies your error.

    If I sell a TSLA 850 call right now at the ask, which has bid/ask 49.80/50.25 , I collect 50.25, not some number minus intrinsic value.
     
  4. anotherdevilsadvocate

    anotherdevilsadvocate Well-Known Member

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    Yeah, sellers would go ballistic if the middleman was taking 70% of sales.
     
  5. Russell McEacharn

    Russell McEacharn New Member

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    Ok, the Premium is the full price of the contract... The intrinsic value is only on options that in in the money (price difference between current and strike), and extrinsic is the greeks. So whatever buyer loses seller gains. Thanks!
     

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