How to Calculate Option Premium: A Complete Guide
One of the most useful skills that an options trader can acquire is knowing how to calculate the option premium. If you are buying a call, selling a cash-secured put, comparing different strike prices, or just want to understand why an option costs the price it does, the premium should be your starting point. The amount of the option premium is by no means a random figure; it takes into account a number of interrelated factors such as the price of the underlying asset, the strike price, the time until expiry, implied volatility, interest rates, and the expected dividends. Furthermore, the actual price at which the option trades is also affected by market supply and demand. The good news is that it is entirely possible for someone who is not a mathematician to understand the calculation of option premiums. You can begin with a simple formula that takes into account intrinsic value and time value, and then proceed to the various pricing models such as Black-Scholes if you want to gain ...