Factors Affecting Options Pricing

The price of an option is determined by multiple variables:

1. Underlying Asset Price:
   • The current price of the asset on which the option is based.
   • For call options, as the underlying asset's price increases, the option's value typically rises; conversely, for put options, the value decreases.
2. Strike Price (Exercise Price):
   • The predetermined price at which the option can be exercised.
   • The relationship between the strike price and the underlying asset's current price affects the option's intrinsic value.
3. Time to Expiration:
   • The duration remaining until the option's expiration date.
   • Options with longer times to expiration generally have higher premiums due to the increased probability of the option ending up in-the-money.
4. Volatility:
   • A measure of the underlying asset's price fluctuations.
   • Higher volatility increases the likelihood of the option becoming profitable, thereby raising its premium.
5. Risk-Free Interest Rate:
   • The theoretical return on an investment with zero risk, often represented by government bond yields.
   • Changes in interest rates can influence the present value of the option's strike price, affecting its premium.
6. Dividends:
   • Expected dividends from the underlying asset can impact option pricing, especially for call options, as dividends can reduce the asset's price on the ex-dividend date.