Most of the time, traders of options are unaware or lack the basic knowledge regarding the derivation of the prices and values of options.
A trader does not need to learn all the theories and detailed models associated with how options are priced.
Just learning the basic concepts underlying the derivation of the options prices is enough to be profitable in option trading.
Just don't forget that you take to heart everything that you learned about pricing options and apply it in the real stock market.
It is dependent on its two basic components.
These components are the intrinsic value which reflects the amount of option and the time value which is referred to as the amount which you paid for the option during a specific length of time until the expiration date of the option arrives.
Pricing is also dependent on six factors.
These factors include the following: 1.
The underlying stock's current price: The value of options is dependent on the price movement of the underlying stocks.
When the value of the stock goes up, the options price will also increase and once the stock's value goes down, the price of option will also decrease.
2.
The option's strike price: This is characterized by the option's intrinsic value.
If the strike price of the option is considered as Out-of-the-money or OTM, the option may be defined as not containing any intrinsic value.
On the other hand, if it is considered as in-the- money or ITM, the stock price is deemed higher than the option's strike price.
3.
Time left before the expiration date of the option: Once the option is nearing its expiration date, chances are its price will also decrease to zero.
4.
Volatility Once a stock is considered as volatile, the pricing will also tend to be high.
If the stock is determined as not volatile, then the option will be priced low.
5.
Rates of Interest: The value will also be dependent on the stock's interest rate.
It is considered as one huge factor that affects the value of options.