Beginner Options Knowledge

# Bonus Insight: What are the mysteries behind the fluctuations in option prices?

Hello everyone, add an order today and tell us in detail: how the complex changes in the price of options (royalties), in the end, come about.

This is not to mention the widely used option pricing formula — the Black-Scholes model.

The specific formula is complex and the average investor does not need to delve too deeply, just know: Based on this formula, the factors that affect the price of the option include the price of the target stock, the option's line price, the remaining time of the option's expiration date, the extrapolated volatility, the dividend rate of the target stock, and the risk-free interest rate.

Below we will look at how these factors affect option prices from a single factor, different values, and a comprehensive consideration of the three dimensions.

## Understanding Single Influencers

First, when discussing a single factor, we all assume that other factors other than this factor are unchanged.

### 1. Price of the target stock

Buying subscription options is a good look at the target stock, so the target stock is fine. Buying put options does not look good on the target stock, so the target stock is not as good as it is.

Therefore, the price of the target stock and the price of the subscription option are positively related, and the price of the put option is inversely related.

### 2. Option Line Price

When the other conditions are the same, which is more expensive than a $100 subscription option and a $200 subscription option? The former is more expensive because the rights are the same, but it costs less to buy the target stock later.

If the exchange is a put option, the $200 option price is more expensive than the $100 option because it has more capital than the target stock can get after selling it.

Therefore, the price of the exercise option and the subscription option is inversely related, and the price of the put option is positively related.

### 3. The remaining time of the expiration date of the option

All the same, an option that expires after 90 days, and an option that expires after 360 days, who are you willing to pay a higher price for?

The answer is the latter, because the more time left, the more likely the target stock price is to change. If short-term options expire unprofitable, there is still some possibility of profit on long-term options.

So whether it is a subscription or a put option, there is a positive relationship with the remaining time of the expiration date.

### 4th. Extruded Wavelength

The other conditions are the same, faced with a target stock, one is that you judge it to have high volatility in the future, and the other is that you judge it to have low future volatility, for which case are you willing to pay a higher option price?

The answer is the former, because high volatility means a wide range of volatility, and there is also a high probability that the share price exceeds the warrant price of the subscription option/lower than the call option.

Therefore, both subscription and short options have a positive relationship with the pullback.

### 5. Dividend rate of the target stock

If a dividend is distributed on the target stock prior to the option maturity date, the share price will subtract the corresponding amount.

This goes back to the relationship between the target stock price and the option price mentioned above: the target stock price falls, the subscription option price usually falls, and the put option price usually rises. So usually the higher the dividend, the lower the subscription price, the higher the put option price.

### 6. Risk-free interest rate

The risk-free rate usually refers to the interest rate on short-term Treasury bonds. How does it affect the price of options?

The higher the risk-free interest rate, the higher the interest earned on the same deposit product for the same term. In turn, a fixed amount of money in the future, refunded to the present, is less and less valuable.

So for subscription options, the money it would have to pay to buy the target stock in the future is worth less now, so the option is more expensive. The put option is reversed. Therefore, the risk-free rate and the subscription option price have a positive relationship and the put option price are inversely related.

## Small knot

Of these factors mentioned above, the first four are the main determinants, while the latter two have a smaller effect on option prices. However, if it is a high-dividend stock, the effect of the yield factor is significant.

The above is a general rule that is unchanged by other factors, but there are also some special cases. For example, with regard to the remaining term of the maturity date, if a high dividend is about to be paid, subscription option buyers may be less willing to buy options that are relatively distant from the maturity date, thus avoiding this situation.

## Understand the impact on different values

The various factors that affect the price of options have been discussed above. What effect does the combination of factors have on the option price? Below we understand the components of the different values of options: intrinsic value and extrinsic value (time value).

### 1. Intrinsic Value

The intrinsic value of options can be understood as: the value that can be obtained when the right is exercised immediately. It is obtained by comparing the positive stock price and the stock option price.

In the case of subscription options: If the target share price is higher than the option price, an immediate exercise is of value, so the option has intrinsic value at this time (i.e. the option belongs to the price). If the target stock price is equal to or below the option price, there is no intrinsic value (options are at or outside the average price). The opposite is true for put options: when the target share price is below the warrant price, the option has intrinsic value, otherwise it does not.

SO IT IS CLEAR THAT THE INTRINSIC VALUE OF OPTIONS IS INFLUENCED BY THE TARGET STOCK PRICE AND THE OPTION'S LINE OPTION PRICE, WHICH IS RELATIVELY WELL UNDERSTOOD.

Put these two factors together, if the higher the target stock price and the lower the bond price, the higher the intrinsic value of the subscription option (positive share price - warrant price), the lower the intrinsic value of the put option (warrant price - positive share price). But if the price of the target stock is higher, the higher the option price, since the relationship between the two factors and the option price is in different directions, it is not good to judge.

You can simply take a look at the option chain. At a certain point in time, the intrinsic value of all options can be obtained by calculating the target stock price and the warrant price. The next moment, if the stock price changes, so does the intrinsic value.

It can also be seen that the part of the in-price option in the option chain, the background color is deeper than the starting off-price option, so it can be quickly differentiated by the background color.

### 2. External Value (Time Value)

The time value part is more complicated.

Whether it has intrinsic value when an option has an expiration date is uncertain. The value of time can be seen as the price paid for this uncertainty.

This part cannot be calculated directly, it can only be calculated by subtracting the intrinsic value with the option price. For example, a subscription option is priced at $10, the target stock price is $38, and the option price is $35. It can be calculated that it has an intrinsic value of $3, so the time value is 10-3=$7.

When it comes to time value, the easiest factor to think of is the time remaining on the due date. In general, the closer the expiration date is, the less time value of the option. And the closer to the due date, the faster the time value is lost.

But another factor that may be easy to overlook is the extrinsic amplitude. As mentioned above, the remaining time on the maturity date and the pullback are actually the possibility of affecting the target stock's volatility prior to the option maturity date, which is directly related to the time value.

In fact, many times, options prices are traded over a short period of time that cannot be explained by the price change of the target stock, and are most likely related to implied volatility. And when market sentiment is high or panicky, it can have a big impact on pullback volatility.

For options with different dates, there is a reference wave for each option, the capital can be viewed on Futubull.

One more thing to say about the influence of time value: it is also related to the distance between the target stock price and the warrant price.

This is a price chart for a Bunny Stock Bullish Option priced at $50, Line 1 represents the intrinsic value (discount) and Line 2 represents the option price (usually a curve). Then the shadow part in the middle is its time value.

It can be observed that the time value of the option is greatest when the stock price is equal to the line option price (the option is a mid-priced option).

Why? Because it is at this time that the uncertainty is highest when options become options with intrinsic value (i.e., in-price options). The farther to the left, the smaller the probability, the higher the certainty. The further to the right, the higher the probability, the greater the certainty. Having said above, time value is the payment for uncertainty.

It is similar in the case of put and put options.

## Complexity Consideration

Although the different value sections help us better understand the specific impact of these factors, it is not enough. Faced with reality, we also need a more integrated perspective.

Positive stock dividends and risk-free rates, such as those we did not mention in the previous section, can have an impact on the target stock price while affecting the intrinsic value and time value of options.

While the previous section deals with two values and related factors, their interactions are also complex. If at times the target stock price rises, it may cause a partial increase in the value of the subscription option; however, time may pass, or the implied volatility decreases, causing the option's time value to decrease; then the option price may not rise or fall at this time.

Therefore, when determining and measuring the price of options, there are a number of factors to consider in combination.

Okay, are you all aware of the factors that influence the price of options? Feel free to share your thoughts in the comments section.