OPTIONS 101: Factors That Drive The Price tag of Place and Get in touch with Options

August 31, 2012


by suanie

OPTIONS 101: Factors That Drive The Cost of Place and Get in touch with Alternatives

In the planet of stock options, there are fundamentally two kinds: call options and place options.

Phone options convey the correct to obtain stock at an agreed to price tag referred to as the strike price tag, whereas place options convey the right to promote stock at an agreed to price tag. In both situations, the alternative “purchaser” has the correct to buy or sell the stock with no obligation to acquire or promote, and the alternative “seller” has the legal obligation to fulfill the terms of the choice contract. But a key query to assume about in stock options investing is “What cost ought to you spend for an choice?” or “What value really should you demand every time you promote an option?”

On the basic level, there are generally six crucial factors that dictate the worth of a stock choice. Three of these elements are discussed under:

Stock Value &amp Trend:

The first issue affecting the price of a stock alternative is the present price and trend of the underlying stock for which the option is written. For instance, if a stock has a gentle uptrend, you will generally locate that call options are a lot more expensive than place options for the stock just since the call is significantly less probably to expire worthless.

If the stock is in a downtrend, you will typically find out that put options are costlier than calls, because the calls are most likely to expire worthless.

Curiously, the absolute price tag of the stock does not affect the premium cost of calls or puts in different phrases, options for a $ 10 stock and a $ 50 stock could nicely have extremely equivalent prices all else getting equal. Nonetheless, we will return to the “price tag” aspect in a moment.

Strike Price tag:

The strike value of a stock option is the cost per share of stock that will be paid if the option is exercised. Thus, the romantic relationship in between the strike price and the really worth of the underlying stock is a main factor in the price tag (i.e., the premium) for the stock alternative. For instance, if a stock is priced at $ 25 per share, then a $ 25 Get in touch with or Place is regarded as “At the money”. The premium for an At-The-Money options is typically a moderate value.

Nevertheless, a $ 20 Phone for a $ 25 stock, currently has $ five of “intrinsic value” meaning you could exercising the contact these days and you’d get the stock for $ five under its present market value. This kind of a get in touch with would have a premium of at least $ five. Because of this, the $ 20 phone can be thought of “In the Cash”.

A $ twenty Put for a $ 25 stock, however, is “Out of the Money”. In other phrases, the stock price tag has to fall by $ 5 or far more by the expiration date to steer clear of expiring worthless. The place has “time value”, even so no “intrinsic worth”. The present premium for the “out of the income” put selection will be significantly reduce than the premium for an at-the-money choice or in-the-income alternative.

Thus, the partnership amongst the present stock cost and the strike value of the choice is a powerful element in the present price of the selection.

Expiration Date (versus the current date):

Stock options are only excellent for a distinct volume of time it could be for just a handful of hours up to far more than 2 years. The date on which the alternative is no longer valid is the “expiration date”. Clearly, an option that expires 3 months from now has more time for the choice to acquire value than 1 that expires nowadays. Thus, the a lot more time there is among now and the expiration date, the larger the premium will be for stock options.

In addition to creating content articles on investing and individual finance, Dr. Stoker has not too long ago published a website on digital pianos. You are welcome to check out it out at

Written by Dr. Bryan Stoker

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