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How is the worth of an option determined?

Updated: 8/17/2019
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14y ago

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The worth of an option depends on a few major components:

1. The price of the underlying stock in relation to its strike price. i.e Options Moneyness
2. Implied volatility
3. Time to Expiration
4. Risk Free Interest Rate
5. Dividends

Out of these 5 components, the first 3 items have the most influence on the price of an option. The Black-Scholes Options Pricing model uses these components in the pricing of stock options as well.

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