1. Strike Price – if the stock price don’t move beyond the strike price, then the option will expire worthless 2. Time to Expiration (time decay) – the longer the time, the higher the option price – the most time decay happens as option is near expiry 3. Effect of Interest Rate on short- term options prices is small
rise in i/r –> rise in CALL, drop in PUT
– rise in Dividends –> drop in CALL
–> rise in PUT
A stock that pays dvds is more valuable than one that does not. Hence, the cost to insure the stock against price drop will be more expensive (PUT) .
and if PUT is more expensive, the CALL is cheaper.
5. Volatility – wider range in stock price –> represents higher volatility
Recommendation: Cboe – IVolatility Services – option calculator to see how option prices are impacted by the variables
6. Implied Volatility
– expectations about the future volatility – How to find IV –> work backwards using B-S model/ any Online Option Pricing CalculatorRecommendation: Visit Cboe IV Index for prices.