Part 6 Learn Instiutitonal Trading

Factors Influencing Option Prices

Option prices (premiums) are affected by several variables, collectively analyzed under option pricing models such as the Black-Scholes model. The main factors include:

Underlying Asset Price: Higher prices increase call premiums and decrease put premiums.

Strike Price: The closer the strike price is to the current price, the higher the premium.

Volatility: More volatility means higher premiums due to increased uncertainty.

Time to Expiry: Longer durations mean more time value.

Interest Rates: Higher interest rates slightly increase call premiums.

Dividends: Expected dividends can reduce call premiums and increase put premiums.