Can an ITM Option Have a Negative Extrinsic Value?
No, an option cannot have a negative extrinsic value. The option's premium is the sum of its intrinsic value and its extrinsic value.
Since the minimum theoretical price for an option is zero, and intrinsic value is also non-negative, the extrinsic value must be zero or positive. If an option were to trade below its intrinsic value, it would present an immediate, risk-free arbitrage opportunity.
Glossar
Risk-Free Arbitrage
Arbitrage ⎊ The theoretical possibility of generating risk-free profit by exploiting price discrepancies for identical or equivalent assets across different markets or exchanges represents a cornerstone of financial theory.
Extrinsic Value
Volatility ⎊ This component represents the portion of an option's premium driven by market uncertainty regarding the underlying crypto asset's future price movement.
Arbitrage-Free Pricing
Principle ⎊ Arbitrage-Free Pricing in cryptocurrency derivatives establishes theoretical valuations predicated on the absence of riskless profit opportunities, mirroring established financial modeling.
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.