# Option price

In financea price premium is paid or received for purchasing or selling options. This price can be split into two components. The intrinsic option price is the difference between the underlying spot price and the strike price, to the extent that this is in favor of the option option price.

For a call optionthe option is in-the-money if the underlying spot price is higher than the strike price; then the intrinsic value is the underlying price minus the strike price. For a put optionthe option is in-the-money if the strike price is higher than the underlying spot price; then the intrinsic value is the strike price minus the underlying spot price.

Otherwise the intrinsic value is zero. The option premium is always greater than the intrinsic value. This is called the Time value. Time value is the amount the option trader is paying for a contract above its intrinsic value, with the belief that prior to expiration the contract value will increase because of a favourable change in the price of the underlying asset.

The longer the length of time until the expiry of the contract, the greater the time option price. There option price many factors which affect option premium. These factors affect the premium of the option with varying intensity. Some of these factors are listed here:. Apart from above, other factors like bond yield or interest **option price** also affect option price premium.

This is because the money invested by the seller can earn this risk free income in any case and hence while selling option; he has to earn more than this because of higher risk he is taking. Because the values of option contracts depend on a number of different variables in addition to the value of the underlying asset, they are complex to value. There are many pricing models in use, although all essentially incorporate the concepts of rational option pricemoneynessoption time value and put-call parity.

Post the financial crisis ofoption price "fair-value" is computed as before, but using the Overnight Index Swap OIS curve for discounting. The OIS is chosen here as it reflects the rate for overnight unsecured lending between banks, and option price thus considered a good indicator of the interbank credit markets.

Relatedly, option price risk neutral value is then adjusted for the impact of counterparty credit risk via a credit valuation adjustmentor CVA, as well as various other X-Value Adjustments which may also be appended. From Wikipedia, the free encyclopedia. This article does not **option price** any sources. Please help improve this article by adding citations to reliable sources.

Unsourced material may be challenged and removed. September Learn how and when to remove this template message. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " option price Options finance Mathematical finance. Articles lacking sources from September All articles lacking sources. Views Read Edit View history. This page was last edited on 10 Aprilat By using this site, you agree to the Terms of Use and Privacy Policy.

In financea price premium is paid or received for purchasing or selling options. This price can be split into two components. The intrinsic value is the difference between the underlying spot price and the strike price, to the extent that this is in favor of the option holder. For a call optionthe option is in-the-money if the underlying spot price is higher than the strike price; then the intrinsic value is the underlying price minus the strike price.

For a put optionthe option price is in-the-money if the strike price is higher than the underlying spot price; then the intrinsic value is the strike price minus the underlying spot price.

Otherwise the intrinsic value is zero. The option premium is always greater than the intrinsic value. This is called the Time value. Time value is the amount the option option price is paying for a contract above its intrinsic value, with the belief option price prior to expiration the contract value will increase because of a favourable change in the price of the underlying asset.

The longer the length of time until the expiry of the contract, the greater the time value. There are many factors which affect option premium. These factors affect the premium of the option with varying option price.

Some of these factors are listed here:. Apart from above, other factors like bond yield or interest rate also affect the premium. This is because the money invested by the seller can earn this risk free income in any option price and hence while selling option; he option price to earn more than this because of higher risk he is taking. Because the values of option contracts depend on a number of different variables in addition to the value of the underlying asset, they are complex to value.

There option price many pricing models in use, although all essentially incorporate the concepts of rational pricingmoneynessoption time value and put-call parity. Post option price financial crisis ofthe "fair-value" is computed as before, but using the Overnight **Option price** Swap OIS curve for discounting. The OIS is option price here as it reflects the rate for overnight unsecured lending between banks, and is thus considered a good indicator of the interbank credit markets.

Relatedly, this risk neutral value is then adjusted for the impact of counterparty credit risk via a credit valuation adjustmentor CVA, as well as option price other X-Value Adjustments which may also be appended. From Wikipedia, the free encyclopedia. This article does not cite any option price. Please help improve this article by adding citations to reliable sources.

Unsourced material may be challenged and removed. September Option price how and when to remove this template message. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Mathematical finance. Articles lacking sources from September All articles lacking sources.

Views Read Edit View history. This page was last edited on 25 Marchat By using this site, you agree to the Terms of Use and Privacy Policy.