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Course: Options and Strategies

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Factors influencing the price

There are several factors that influence the price of an option:

  • Underlying price: The price of the underlying asset (e.g. stock, commodity, or currency) affects the option price. A change in the underlying price will result in a corresponding change in the option price.
  • Time to expiration: The closer the option is to expiration, the more the option price will be affected by changes in the underlying price.
  • Strike price: The strike price of an option is the price at which the option can be exercised. Options with a strike price close to the current underlying price are more valuable than options with a strike price far from the current underlying price.
  • Implied volatility: Implied volatility is a measure of how much the price of an asset is expected to move in the future. Higher implied volatility results in higher option prices.
  • Interest rates: Interest rates have an impact on the option price because they influence the time value component of an option. Higher interest rates result in higher option prices.
  • Dividends: Dividends on the underlying asset can also impact the option price. If an underlying asset pays a dividend, call options will be affected more than put options.

A change in any of these factors will affect the option price, and it's important for traders to be aware of these factors when evaluating option positions. This lesson shows how the option premium changes when other variables change - e.g. when the interest rate is decreasing or the risk is increasing.

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