Intrinsic Value

TABLE OF CONTENTS


What is Intrinsic Value in Options?


Intrinsic value is the difference between the Spot price and the Strike price of an option. As the name suggests, it is basically the natural Value of an Options Strike. 


Example


BankNifty Options -  40000CE when 

BankNifty Spot -   42000 


Intrinsic Value of 40000CE in this case is 2000 i.e, 42000 - 40000.


Can Intrinsic Value be negative?


No, Intrinsic value can never be negative or 0.


What type of Options will have Intrinsic Value?


All In The Money Options will carry an Intrinsic value. It will not be applicable for At the Money and Out of the Money Contracts


Will orders in all In The Money Contracts be verified for Intrinsic Value concept in Rocket Plus?


No. It is practically not possible. Close to the Money Options may trade much away from Intrinsic value as they tend to be highly volatile. Let's again take an example of an option which is Close to The Money


Bank Nifty Spot - 40000

Bank Nifty Option - 39900CE

Therefore, the Intrinsic Value - Rupees 100

20% of Intrinsic Value is Rupees 2


If the Intrinsic Value Rule is applied for this strike too, then you will not be able to place any order less than 98 or above 102 which might not be practical as it might trade beyond this range in the market. It will therefore, not be correct to block an option based on the order price when it actually trades around the order price level in the market.


Therefore, Option Strikes which are 7% or less than 7% In the Money will NOT go through the Intrinsic value check. In the above example, strikes between 39900 CE and 37200CE will not be subject to Intrinsic Value Check. Similarly Strikes between 40100PE and 42800PE will not be subject to Intrinsic Value Check. 


What is the Intrinsic Value Check in Rocket Plus ?


The following 2 checks will be run for Intrinsic Value check in Rocket Plus.


a) All Options strike beyond 7% of Spot Price. For example, when Bank Nifty Spot is at 40000, all strikes which are less than 37200CE and above 42800PE will run through Intrinsic Value check


b) For the above strikes, ie., for strikes less than 37200CE and above 42800PE,  all orders placed beyond 20% of the Intrinsic Value will be rejected. 


Example:


Buy order in 37100 CE 

The intrinsic Value is 2900

Orders placed less than or more than 20% of the Intrinsic Value will be rejected. 

That is orders placed less than 2900 - 580 = 2320 and placed above 3480 will be rejected


Buy order in 42900 PE

The intrinsic Value is 2900

Orders placed less than or more than 20% of the Intrinsic Value will be rejected.

That is orders placed less than 2900 - 580 = 2320 and placed above 3480 will be rejected


When orders for higher than the 3480 gets rejected, kindly contact us to place the orders offline.


What is the Intrinsic Value check in Rocket Trading Platform?


The following 2 checks will be run for Intrinsic Value check in Rocket.


a) All Options strikes which has positive Intrinsic Value will be subject to a check. For Example, if Bank Nifty is 40000, all Call options less than 40000 and all Put options greater than 40000 will run through Intrinsic Value check


b) For the above strikes, ie., for strikes less than 40000CE and above 40000PE,  all orders placed beyond 5% of the Intrinsic Value will be rejected.


Example:


Buy order in 39900 CE 

The intrinsic Value is 100

Orders placed less than 5% of the Intrinsic Value will be rejected. 

That is orders placed to buy or sell less than 100 -5 = 95 will be rejected


Sell order in 40100 PE

The intrinsic Value is 100

Orders placed less than 5% of the Intrinsic Value will be rejected. 

That is orders placed to buy or sell less than 100 -5 = 95 will be rejected


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