What are the factors that affect option prices?
Based on the value of the option, the market's supply and demand relationship for the option contract determines the market price of the option, that is, the premium. From the perspective of option elements, option prices are usually affected by factors such as the underlying price, exercise price, contract expiration period, market risk-free interest rate, and underlying security price volatility.
(1) The price of the option underlying. If the underlying price rises, the price of the call option will rise, while the price of the put option will fall. For the aforementioned call option with an exercise price of 65 yuan, if the underlying price rises from 63 yuan to 68 yuan, then the contract will change from virtual value to real value, so the price of the option will also rise accordingly. For a put option with the same exercise price of 65 yuan, if the underlying price rises from 63 yuan to 68 yuan, the option will change from real value to out of value, and its price will fall.
(2) The exercise price of the option. The higher the strike price, the lower the price of a call option and the higher the price of a put option. A call option with a strike price of $55 is more expensive than a call option with a strike price of $65 because the option buyer can buy the underlying security at a better price. By the same token, a put option with a strike price of $75 is more expensive than a put option with a strike price of $65 because the option buyer can sell the underlying security at a higher price.
(3) The contract expiration period of the option. For options, the longer the option expiration period, the greater the possibility of profit for the option buyer, and the greater the risk that the option seller has to bear, so the higher the option price. From another perspective, the longer the option expiration period, the higher the time value of the option. If options are compared to insurance, the longer the insurance period, the higher the premium paid should be.
(4) The market risk-free interest rate of options. Call options have the nature of financing the purchase of underlying securities. The higher the risk-free interest rate in the market, the higher the financing cost and the higher the price of the call option. In the same way, buying a put option can achieve the effect of short selling the underlying security. If you simply short the underlying security, the investor will receive cash income, but there is no cash income from buying a put option. The higher the risk-free interest rate in the market, the more unfavorable it is for put option investors, so the price of the put option is lower.
(5) The price volatility of the underlying security of the option. The volatility of the underlying security's price is a measure of uncertainty about future price changes in the underlying security. Simply put, the higher the volatility of the underlying security's price, the higher the likelihood that the option contract will expire in-the-money, and therefore the corresponding contract will have a higher price. Volatility is divided into historical volatility and implied volatility.
The factors that affect option prices, such as underlying price, exercise price, expiration period, and market risk-free interest rate, can all be directly observed, but volatility can only be estimated. The impact of the above five factors on option prices assumes that only one factor changes and the other four factors remain unchanged. This is not the actual situation, so investors should actively learn options knowledge and seriously participate in fully simulated trading to further understand options trading.
The above is a brief introduction about "What are the factors that affect option prices", I hope it can help you. Futures trading can make your life rich but can also shrink your property. When doing transactions, you must control the risks and preserving the principal is the most important thing. To speculate in futures well, you must start by opening a futures account. Depending on the futures company you open an account with, the futures handling fees you receive are also different. Some are as high as several times that of the exchange, and some only add 1 cent to the futures exchange! To open a futures account, just choose a futures company that is reliable and has cheap futures handling fees. The editor will explain to you the account opening issue of adding 1 point to the futures handling fee, so as to save you extra futures handling fees. Finally, I once again remind everyone that investment is risky and you need to be cautious when entering the market! I wish everyone good returns in the futures market.