Question

factors that determine the theoretical valuation of options

Answer 1

Following factors determine the theoretical valuation of options:

(1) Underlying price- it is the price of underlying assets and it influence the value of option premium

(2) Strike price- Strike price is the price at which underlying asset would be exchanged. Strike price is used to calculate intrinsic value. Intrinsic value is the difference between the strike price of the option and the current price of the underlying asset

(3) Time Until Expiration- means the time left before maturity, the value of option would change according to time until expiration

(4) Expected volatility - refers to the speed and magnitude of underlying price changes. this also affect the value of option

(5) Interest rates and dividend are the other factors that influence the valuation of option.