Option prices (premiums) are influenced by both market inputs and theoretical models. The premium consists of:
| Factor | Description | Effect on Option Price |
|---|---|---|
| Underlying Asset Price | Current market price of the stock or ETF. | Higher for calls when price rises; higher for puts when price falls. |
| Strike Price | Exercise price of the option. | Closer to the money → higher premium. |
| Time to Expiration | Remaining life of the option. | More time = more extrinsic value. |
| Implied Volatility (IV) | Market’s forecast of future volatility. | Higher IV = higher premium. |
| Interest Rates | Risk-free rate used in pricing models. | Higher rates slightly increase call prices, decrease put prices. |
| Dividends | Expected payouts during the option’s life. | Lower call prices, higher put prices. |
Used to measure sensitivity to each factor: