Several factors affect the prices of puts and calls. Most investors understand that the price of the underlying asset (stock, ETF, index, etc.) has a big impact on the value of an option. For example, if IBM shares move higher, IBM calls should increase in value. However, the price of the underlying stock isn’t the only factor that will influence the value of a contract and understanding all of the determinants of options prices greatly increases the odds of success when investing in puts and calls. All of these factors will be discussed in greater detail in future installments of Options 101. For now, the six key determinants of options prices are:
1. The price of the underlying asset.
2. The strike price of the put or call option.
3. Time left until expiration.
6. Interest Rates.
Category: Trading Education