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Part 3 Learn Institutional Trading

29
Option Pricing & Premiums

The premium (price of option) is determined by many factors:

Intrinsic Value – Difference between current stock price and strike price. Example: If stock = ₹200, strike = ₹180 (call), intrinsic value = ₹20.

Time Value – Extra premium because of time left until expiry. More time = higher premium.

Volatility – Higher volatility increases premium (uncertainty = higher value).

Interest rates & dividends – Also affect option pricing slightly.

The most famous model for pricing options is the Black-Scholes Model, used worldwide.

Moneyness (ITM, ATM, OTM)

Options are classified as:

In The Money (ITM): Option already has intrinsic value. (Example: Stock = ₹250, Call strike = ₹240).

At The Money (ATM): Stock price = strike price.

Out of The Money (OTM): Option has no intrinsic value yet. (Example: Stock = ₹250, Call strike = ₹280).

OTM options are cheaper, but riskier. ITM options are costlier, but safer.

כתב ויתור

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