The option price is determined by factors, Factors Affecting Option Prices - TradingTechnicals


Sree Rama Rao Finance Management In this article we are considering determination of the present values delta theta options options.

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Boundaries: Before we identify the factors determining options values, it is helpful to specify the boundaries within which the value of an option falls. The minimum value at which a call option sells before the expiration date, say, at time zero, is max 0, S0 — E.

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This means that C0, the value of a call options can never fall blow zero this happens when S0 E. In this case it pays an investor to buy the call option for 75 exercise it forand finally sell the stock or Such a profit cannot occur in a well functioning financial market. Hence in such a market C0 cannot sell for less than S0 — E What is the upper limit for the option price?

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A call option entitles the holder to buy the underlying stock on payment of a certain exercise price. Hence its value cannot be greater than that of the underlying stock.

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If it were so, the investor would be better off by buying the stock directly. Key Factors As indicated above, the price of call option must fall in shaded region. The precise location of the option value depends on five key factors: 1.

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Exercise price.