Essay: Pricing of the options

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Essay: Pricing of the options

Sample Essay

Option pricing is fundamental in option trading since it gives understanding how the premiums are calculated which the core and gives meaning to term trade. Premium is calculated on two bases of the intrinsic value and the time value (Jabbers, 1998). Time value is based on the investor’s amount he or she is prepared to pay for the possibility that the market might move in your favor during the option life. Time value for the premiums varies within out-of-the-money, at-the-money and in-the-money; but greatest at at-the-money options.

The time value is influenced by Time to expiry, Volatility, Interest rates, Dividend payments and Market expectations (Jabbers, 1998). While on the other hand of the intrinsic value, is derived from the difference between the market price of the underlying shares and the exercise price of the option at any given time. But basically there shall result in variation between the call option and the put option values.

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