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Pricing of Option Option Chai easy 07 et cE ee (| wonder how the) ) prices of premium are determined 3 Key elements determining Premium ~~~ rm ited) : ous Stock rice © = Price ‘& . Premium More = More Time ~ Premium Price Y au Premium Vv + Volatility Low Volatility Stock / Index High Volatility Stock / Index Weer] ett eo More = More Volatility Premium Low Premium for Option High Premium for Option me to Expiration Understanding how time value reduces At the Start of the Contract Time Value = Premium - Intrinsic Value Here, Intrinsic Value is For Call Option For Put Option Stock Price - Strike Price Strike Price - Stock Price Positive time value represents hope that price will move in trader's direction | tT Option time value to start reducing Fastest time value reduction over last 10 days At expiry time value 0 is zero At the end of the contract Intrinsic Value = Premium. _WISE ADVISOR SAYS BCs Wael ice lM ee Are EE mee nu ele Due ue Underlying Stock Price Time to Expiration - 30 Days 150 125 125 100 Start Expiry Corey ton , ITM In the money, ATM - At the money, OTM - Out of the money At Start ss sa ko BE (Te) Pomme A B C=AB D E=C+D F 125 115 10 225 41.25 tT™ 125 120 5 2.50 7.50 'T™ 125 125 0 5.00 5.00 ATM 125 130 0 2.50 2.50 OTM 125 135 0 1.25 125 OTM At Expiry (SP) site ke nia i) Poms Sats A B C=AB D E=C+D F 125 415 10 0 10 ITM 125 120 5 0 5 'TM 125 125 0 0 0 ATM 425 130 0 0 0 OTM 125 135 Oo 0 0 OTM At Start A BAB CD 115 125 Oo 1.25 1.25. OTM 120 125 0 2.50 2.50 O™ 125 125 0 5.00 5.00 ATM 130 125 5 2.50 7.50 I™ 135, 125 10 1.25 11.25 I™ At Expiry CS En Gn eo A B C=AB D E=C+D F 115 125 o 0 0 OTM 120 125 0 0 0 OTM 125 125 o 0 0 ATM 130 125 5 0 5 I™ 135 125 10 0 40 I™ *Intrinsic value is never negative WISE ADVISOR SAYS As traders we need to keep an eye on open interest which eee eR Ce ets Me Res ined Cees Reece tte)