Option prices
This section discusses pricing of options.
There are six factors affecting the price of an option:
- The current price of the underlier
- The strike price
- The time to expiration
- The volatility of the underlier
- Risk-free interest rate
- Dividends expected during the life of the option
The following sections discuss the consequences for the option
price for a change in one of the above factors, assuming that
the others remain constant.
Stock price and strike price
Call options become more valuable as the stock price increases
and as the strike price decreases. Put options behave in the
opposite way.
Time to expiration
Volatility
Risk-free interest rate
Dividends
