In this article, we will discuss
- Components of Options Premium
- Formula for Calculating Option Premium
- Factors Affecting Options Premium
- Difference Between Futures and Options
- Differences in trading and settlement
- Premium calculation for futures and options
Components of Options PremiumThe price an option buyer pays an option seller in exchange for the right, but not the duty, to purchase or sell an underlying asset at a defined price and time is known as the options premium. The price of an option is influenced by a number of variables, including the underlying asset's current value, the amount of time left before it expires, and the projected volatility of its price. The intrinsic value, time value, and volatility value are the three basic parts that make up the option premium.
Formula for Calculating Option PremiumThe formula for calculating option premium takes into account the three main components of an option's price: intrinsic value, time value, and volatility value. The basic formula for calculating the price of an option is:Option Premium = Intrinsic Value + Time Value + Volatility ValueThe intrinsic value is calculated by subtracting the strike price from the current market price of the underlying asset. The time value and volatility value are more complex to calculate and are usually estimated using options pricing models such as the Black-Scholes model.
Factors Affecting Options Premium
Price volatility of the underlying asset
Time to expiration
Difference Between Futures and OptionsFutures and options are two popular financial derivatives that offer investors opportunities to speculate on price movements and manage risk. While both futures and options have similarities, such as the ability to trade on exchanges and the use of underlying assets, they differ in several important ways as follows:
Definition of futures and options