• Factors deciding Option Premium

    Call and Put options premiums are decided based on the below parameters

    • Premium depends on the strike price. If it is near to the current market price, the premium will be higher as it increases the chance of closing above the strike price for call option and below the strike price for put option.
    • Premium depends on the time to expiry date. More far the expiry date, more probability to close above the strike price for call option and below the strike price for put option. That’s why in the beginning the premium stays very high which decreases later.
    • As premium decreases with time near to expiry date, for range bound index or share price premium of both the call and put options decreases with time and the put/call writers make profits.
    • Premium moves faster when it is near to the strike price. This is explained by the “delta” of options.

    There is significant risks involved in the options trading as it increases the money exposure in the market and it is done based on complete speculation and prediction of the future movement of share prices. The decreasing premium value at a very high rate and limitation of expiry date also increases the risks.

    Post Tagged with , ,

Leave a Reply

Your email address will not be published. Required fields are marked *