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Tag: Intrinsic Value

  • Factors That Decide An Option’s Premium

    Factors That Decide An Option’s Premium
    Any trader will tell you that in order to be successful, you have to understand and, more importantly, master the concept of option pricing and how to figure out its correct value.

    When you look at all the things that affect an option’s price, you can figure out what its real price is. Let’s look at oil as an example. The final prices of petroleum depend on consumer demand, the price of crude oil, the time of year, local and state taxes, refinery output, etc. If you want to know or figure out the price of an option before you buy or sell it, you can use a mathematical model like the Black Scholes model. You only need to think about the different parts of the model to figure out the right price.

    Being a successful trader depends on several things, but most importantly it depends on the kind of platform you use to trade. As a stock broker, we understand this and offer the best trading platform to our users that provides them with the best trading accounts.

    Putting a price on an option depends on a number of things.

    The stock’s current price: If you’re interested in a call option that lets you buy shares of X company for, say, Rs 350 each, you’d probably be willing to pay more for that call when the stock is trading at Rs 320 instead of Rs 350. This is because the call option gets much closer to being ITM at Rs 49 than it would have been if it traded at Rs 40. Put options, on the other hand, do the opposite.

    The Strike Price: This is the price that a call owner has to pay to buy stock, while a put owner has to pay if he wants to sell his stock. This is like the example that was given above. Most of the time, it costs more to get the right to buy stock at Rs 350 than at Rs 380. The average investor would, of course, like to have the right to buy stocks at lower prices at any time of day. With the strike price going down, this makes calls cost more. In the same way, the value of puts goes up when the strike price goes up.

    Time before expiration: It’s important to remember that all options have a set amount of time they can be used and usually end on or after a certain date. Because of this, the value of an option goes down as time goes on. The more time there is until expiration, the more likely it is that you can make moves that will make you money.

    Interest rates: This is not a very important factor when figuring out the price of an option. When interest rates go up, so do the prices of call options. When the trader chooses the call option instead of the stock, any extra cash in his account should, at least in theory, earn him interest. This doesn’t really happen in the real world, but the basic idea makes sense.

    Dividends: When a stock trades but the owner doesn’t get any dividends, this is called “ex-dividend,” and the price of the stock goes down by the amount of the dividend that was due. When dividends go up, put values go up and call values go down.

    Volatility is thought to be the most important variable. In simple terms, volatility is the difference between the prices of stocks from one day to the next. It can also be called swings in the price of a stock. When compared to stocks that are less likely to change, volatile stocks are more likely to have a different strike price level. When investors make big moves, their chances of making money go up. So, options on stocks that change a lot are definitely more expensive than options on stocks that change less or not at all. So, it’s important to remember that even small changes in estimates of volatility have a big effect on the prices of options. Volatility is usually thought of as an estimate, and if you only have an estimate, especially of future volatility, it’s almost impossible to figure out the right option value.

    As we mentioned earlier being successful as a trader depends on several things, but most importantly it depends on the kind of platform you use to trade. As a stock broker, we understand this and offer the best trading platform to our users that provides them with the best trading accounts.



  • What exactly is the intrinsic value of a stock?

    Have you ever thought about why one stock might sell for Rs 200 and another for Rs 20? How do these prices get set? In this article, we’ll talk about what intrinsic value is.

    What Does Internal Value Mean?

    The true value of a stock is called its “intrinsic value.” This is calculated based on anticipated monetary benefits. Let’s put it this way: it is the most you can pay for the asset without losing money when you sell it later.

    Technical analysis helps you figure out how the price of a stock will move and what price levels it may reach. But the price is still very closely tied to what the stock is really worth. So, technical analysis only helps figure out where and how much a stock’s price will move.

    Prices have to start from somewhere before they can move in a certain direction. Say that the price of stock right now is Rs 300. Based on your technical analysis, it looks like it might go up to Rs 330. But how did the price of Rs 300 get there? There is a way to figure it out.

    Let’s use the example of buying a house. The main reason for building this apartment is to rent it out.

    Let’s say you want to keep it for 10 years. You shouldn’t pay more than you can make from it. In other words, the total amount of rent you could get in 10 years plus the price you could get if you sold it after 10 years. The value found in this way would be the flat’s true value.

    This value is adjusted for things like inflation and different kinds of risks to make sure it is correct. This will come up again in the section. The discounted cash flow model or the present value model is a way to figure out the true value of something. It can also be used to figure out what a stock is really worth.

    So, the bottom line is that a stock’s “intrinsic value” is the total amount you could make from it in the future.

    The question then is: How much money can you expect to make in the future from shares? When you buy stocks, the company gives you a piece of its annual profit. We call this a dividend. If you add up the value of the dividends and the price at which the share will be sold in the future (called the “terminal value”), you can figure out what the share is really worth.

    However, does Rs 200 in dividends today have the same value as Rs 200 in dividends 10 years from now? The value of Rs 100 in ten years is less than the value of Rs 100 today. In other words, inflation makes money worth less over time.

    To account for this change in value, you will have to use a method called “discounting” on each future dividend. In this step, you will divide each of the future dividends by a certain rate and then add them all up. Add the values to get the intrinsic value.

    RELATIVE VALUE METHOD: Now, let’s talk about the second way to figure out what a stock is really worth. This is done by comparing the price of the stock with one of the most important things about the company.

    Some key fundamentals include sales revenue, net income or profit (also called earnings), book value of equity shares, etc. When you buy shares of a company, you own a piece of the company’s core assets. For instance, you might get a share of the company’s sales or profits. This is because when you buy shares, you become a part-owner of the business.

    Now, it makes sense that you should always try to buy something at a good price and pay as little as possible. The less these shares cost on the market, the less you have to pay per unit to buy these fundamentals.

    Let’s look at a specific case. The price to earnings (PE) ratio is one of the ratios you can use to compare prices. In this ratio, you compare the price of a company’s share to how much it earns per share. If the price per share is Rs 300 and the earnings per share (EPS) is Rs 30, the PE will be Rs 10. This means that you pay Rs 10 for each rupee that the company makes.

    How do you know whether or not this price is fair? To find this, you must compare it to the PEs of the company’s competitors. If, for example, the average PE of your competitors is 15, you are paying less for your shares. This is because you have to pay an average of Rs 15 per unit of earnings for a share of one of the competitors. But you only pay Rs 10 for your company. Because of this, this method is called the relative value method.

    You can also use this method to figure out how much a company’s stock is really worth. By rearranging the formula for PE, you can see that the stock’s real value is the sum of PE and EPS. Now, take the average PE of your competitors, which is 15, and multiply it by the EPS of your company, which is 10. This will give you the intrinsic value of your stock. It adds up to Rs. 150. This means that Rs 150 is a fair price for your stock. Since you can buy it in the market for only Rs 120, it is a great deal. You can buy it with the expectation that it will go up to this fair value.

    The relative value method is important because it uses both the fundamentals of the company and market trends to figure out how much a stock is really worth. This makes it more real, but also more likely to be wrong. If fundamentals change a lot in the future, your estimate of the stock’s true value could be wrong.

  • Fundamental Analysis 101 – 5 Things To Get You Started

    Fundamental analysis is about getting to know a company, its business, and its future plans better. It includes reading and analysing annual reports and financial statements to get a sense of the company’s strengths and weaknesses, as well as its competitors.

    Before you get started on your journey of investments, we believe that you deserve one of the best trading accounts from one of the top brokers in share market. With Zebu, you get access to a state-of-the-art online trading platform with which you can perform comprehensive fundamental and technical analysis.

    A few of the important parameters while doing fundamental analysis are:

    1. Net Profit
    Net profit can mean different things to different people. Net means “after all the deductions.” It’s common to think of net profit as profit after all the operating costs have been taken out, especially the fixed costs or overheads. Gross profit gives investors the difference between sales and direct costs of goods sold before operating costs or overheads are taken into account. This is not the case here. It is also called Profit After Tax (PAT), which is the profit figure that is left after taxes are taken out of the profit.

    2. Profit Margins
    The earnings of a company don’t tell the entire story. Earning more money is good, but if the cost goes up more than the revenue, the profit margin doesn’t get better. The profit margin shows how much money the company makes from each rupee of sales. This measure is very useful when you want to compare businesses in the same industry.
    On the basis of a simple formula:
    Net income / Revenue = Profit margin
    In this case, a higher profit margin means that the company is better able to control its costs than its competitors are. The profit margin is shown in percentages.
    If a company makes 10 paise for every rupee they make, then the profit margin is 10%. This means that the company makes 10 paise for every rupee they make.

    3. Return on Equity Ratio
    Return on Equity (ROE) shows how well a company does at making money. It is a ratio of revenue and profits to the value of the company’s stock. Find out how much profit a company can make with the money its shareholders have put into it. A simple way to do this is to look at the return on equity ratio,

    The Return on Equity Ratio is calculated as shown.

    Return on equity = Net Income / Shareholder’s Equity

    It is calculated in rupees.

    This factor is important because it tells you about a lot of other things, like leverage (debt of the company), revenue, profits and margins, returns to shareholders.

    For example, a company called XYZ Ltd. made a net profit (before dividends) of Rs. 1,00,000. During the year, it paid out dividends of Rs. 10,000. XYZ Ltd. also had 500, Rs.50 par common shares on the market during the year, as well. That’s how the ROE would be calculated then.

    ROE = 1,00,000–10,000/500*50 = Rs. 3.6.

    Simply put, those who own shares in the company will get back Rs. 3.6 for every rupee they invest in the company.

    4. Price to Earnings (P/E) Ratio

    People often use the Price-to-Earnings (P/E) ratio to figure out how much a share of a company is worth. It tells us how much money the company makes per share in the market today.
    We can figure out the Price of earnings, or PE ratio, as shown below.
    In simple terms, PE = Price per Share / Earnings per Share
    This also helps when you want to compare businesses. Then companies should figure out their EPS and then figure out how much their PE ratio value is.
    A high P/E means that the stock is priced high compared to its earnings. Companies with higher P/E seem to be more expensive. However, this measure, as well as other financial ratios, must be compared to other companies in the same industry or to the company’s own P/E history to be useful.
    If company XYZ has a share that costs 50 rupees, and its earnings per share for the year are 10 rupees per share.

    The P/E Ratio is 50/10, which is 5.

    5. Price-to-Book (P/B) Ratio
    A Price-to-Book (P/B) ratio is used to compare a stock’s value on the market to its value on the books. Calculating the P/B ratio is the way to figure out if you’re paying too much for the stock because it shows how much money the company would have leftover if it were to close down today.
    P/BV Ratio = Current Market Price per Share / Book Value per Share
    Book Value per Share = Book Value / Total number of shares
    Having a higher P/B ratio than 1 means that the share price is higher than what the company’s assets would be sold for, which means that the share price is higher. The difference shows what investors think about the future growth of the company.

    XYZ company, for example, has 10,000 shares trading at Rs.10 each. This year, the company recorded a net value of Rs. 50,000 on its balance sheet. The price-to-book ratio of the corporation would be as follows:

    50,000 / 10,000 = Book Value per Share

    P/BV Ratio = 10 / 5

    P/BV Ratio = 2

    The company’s market price is two times its book value. This signifies that the company’s stock is worth twice as much as the balance sheet’s net worth. Also, because investors are ready to pay more for the business’s shares than they are worth, this company would be called overvalued.

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