Option price can be calculated by model. The following is the composition of the option price. Among the factors that affect the option price, only the volatility is uncertain, and it is also decided by investors themselves.

Option price composition

Option fee is the fee that the option buyer must pay to the seller in order to obtain the option. For option sellers, it is the income from selling options. Most traders trade options only to earn the difference between buying and selling royalties.

Royalties are generated by bidding between buyers and sellers. Royalty is divided into two parts, that is, connotation value and time value. Royalty = connotation value+time value.

1. Connotation value

Intrinsic value is the profit that can be obtained when the option contract is executed immediately.

For call options, intrinsic value is the difference between the exercise price and the futures price.

For put options, intrinsic value is the difference between exercise price and futures price.

2. Time value

Time value refers to the part where the premium exceeds the intrinsic value before the option expires. That is, option premium minus intrinsic value. Generally speaking, the longer the expiration time, the greater the time value of options.

As the expiration date of options approaches, the time value of options gradually decreases. On the expiration date, the option no longer has time value. Option values are all connotative values.

Generally speaking, flat options have the greatest time value and are usually the most active in trading. When the option is at a flat value, it is difficult to determine the direction of the option to real value or imaginary value. If it is converted into real value, the buyer gains; if it is converted into imaginary value, the seller gains, so it is the most speculative and has the greatest time value.

Real option premium = connotation value+time value;

Equal option premium = time value;

Virtual option premium = time value.