What are the elements that can change the value of the premium of an Options ?

Six factors affect the premium for an option.

 

Price of the underpinning: If the price of the sub-underlying rises, the premium value for Call Option will increase while that of Put Option will decrease.

The intrinsic value of an option is the amount of an option that can be exercised today. So, the spot price is different from strike price. A decrease in intrinsic value can affect the value or Call Option, while an increase can boost the value of the Put Option.

Volatility of underlying stock: This is the probability that the price of the underlying will fluctuate. It also impacts the value of the Option. Higher volatility will result in a higher premium.

Time until expiration: This affects the premium. The premium will be lower if the expiration date is closer to the actual one, and vice versa.

No risk interest rate: The country's prevailing interest rates have an indirect and nominal impact on premium pricing. High interest rates equals high premium, and vice versa.

Premium pricing is also affected by dividends. The Options prices are adjusted to account for non-dividend day dividends of greater than 10%. This is according to SEBI regulations. The premium will decrease if the dividend is higher, and vice versa.

Market factors have an impact on the call option price and the put option price

 

Factor

 

Call Option Price Effect

 

Influence on the Put Option Price

 

Value increase

 

Increase

 

Diminution

 

Intense value increase

 

Diminution

 

The increase

 

Time Value Increase

 

Increase

 

Augmentation

 

Volatility is rising

 

Increase

 

Increase

 

Inflation rates increase

 

Increase

 

Diminution

 

Increase in Dividends

 

Diminution

 

Increase