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Financial advisory
RES5Financial Advisory Services✓An option to buy a share at S$10 has an intrinsic value of S$5 when the share trades at S$15. If the share price rises 20% to S$18, the option's intrinsic value rises to S$8 — a 60% increase. This demonstrates that:
A 20% move in the underlying produced a 60% change in intrinsic value, illustrating the leveraging (gearing) effect of derivatives; once the share falls below the exercise price the option's intrinsic value becomes zero even though the shares retain value.
Derivatives are MORE volatile than the underlying, and they can indeed expire worthless — the opposite of the 'less volatile' and 'never expires worthless' distractors.
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