Remarks 164These simple profit/loss representations do not take into account:The time value of money. In other words, the fact that the cost of the callis paid prior to the payoff at expiration.
Taxes.
Transaction costs.In/at/out of the moneyAt the money: Current price of underlying equals exercise price.In the money: Immediate exercise would result in a profit.Out of the money: Immediate exercise would result in a loss.Intrinsic value of an option= profit / loss if exercised immediatelyTime value: There is always a positive probability of a favorableunderlying price movement.
Option value = Intrinsic value of an option + time value
Derivative securities: Options - Introduction