Net options value (NOV), or net options premium is the credit or debit value of all options positions combined, marketed-to-the-marketer. For example, when a trader purchases an options contract, they are given a net options value credit, which reflects the value of their options contract. The trader can then use that credit towards other debits like initial margin requirements or towards the debit of other options contracts. The NOV really helps give traders more flexibility and gives traders more options when purchasing options positions.
Net Options Value Calculation
The net options value calculation is as follows:
Net options premium = (price of options sold – commission rate) – (price of options purchased – commission).
This is important to know, because options don’t automatically have a value. The trader needs to know how this calculation to determine the value of the options they are holding.
Intrinsic Value vs. Extrinsic Value
In order to fully understand net options value, one must also understand the difference between time value, also known as extrinsic value, and intrinsic value. Intrinsic value is simply the amount by which an option is in the money. Time value is the amount of money options buyers are willing to pay above the intrinsic value of an option with the belief that overtime the underlying futures price will change, thus causing the option value to increase. When you add the intrinsic and time value together, you get the net options value.
Why Net Options are Important
Net options premiums are important because they are a crucial cog when it comes to hedging and other strategies aimed at mitigating risk. When an investor buys and sells options at the same time in a given commodity or security, they are usually trying to use both the upside and downside of that particular order. The belief is, by doing this they can skim money off the top. Because the investor both purchased and sold options, they are protecting themselves against any major movements, thus mitigating their risk. If an investor wanted to, they could theoretically just buy and sell options on the same security and try to make money off the net options value.
The net options value should be used when a trader is hedging. It is very useful when traders want to partake in a trade that involves spreads or strategies containing two or more options. This gives the trader an opportunity to occupy multiple positions on the option. They can go long or short, and the position they decide to occupy will impact the final price of the option.