How to Decides on the Premium Paid on Options Trading. How is it
Calculated ?
Options
Premium is not fixed by the Stock Exchange.
The
fair value / or theoretical price of an
option can be known with the help of pricing models and then depending on market conditions the price
is determined by competitive bids and offers in the trading environment.
An
option's premium / or price is the sum
of Intrinsic value and time value (explained above).
If
the price of the underlying stock is held constant, the intrinsic value portion
of an option premium will remain constant as well.
Therefore,
any change in the price of the option will be entirely due to a change in the
option's time value.
The
time value component of the option premium can change in response to a change
in the volatility of the underlying, the time to expiry, interest rate
fluctuations, dividend payments and to the immediate effect of supply and demand for both the underlying abd its
option.
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