Short Premium’s Relationship to Extrinsic Value

<p>Option prices are always broken down into two pieces: <a href="https://ontt.tv/3ig03EL">intrinsic value and extrinsic value</a>. As out-of-the-money premium sellers, extrinsic value is of extreme importance to our positions. Specifically, our hope with any short premium position is that the extrinsic value will decrease, so the option price will fall and our position will become profitable.</p><p>Interestingly though, there are times when the extrinsic value on a position can significantly increase, <a href="https://ontt.tv/SJBaK">seemingly out of nowhere</a>, which could leave us with a loss. With our FL position that we recently closed, we unpack how this exact phenomenon occurred.</p>