Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
option is said to be $10 out of the money. In our example, as the stock price moves down, some of its options may go out of the money and as it moves up some of its options may go in the money. For example, if the stock moves from $50 to $55, FAJ will go out of the money while FAK will become at the money. You may be starting to get a feel for how the option prices work. In simplistic terms if the option is out of or at the money, its time value premium is its price. But if the option is in the money, its time value premium is added to the dollar amount by which the option is in the money (intrinsic value) to get the full price.
Intrinsic And Time Values
Just like any other type of security, option prices are pretty much driven by supply and demand. But there are always factors that produce an imbalance in supply and demand, causing prices to move up or down. Let's go over the elements that determine or influence an option's price. These are:
Supply And Demand - Again, this is the most basic of all. If there is more demand for a particular option while supplies are kept constant, the option's price will rise. The question is what would cause the higher (or lower) demand (or supply). The remaining items would explain this.
Underlying Stock Price - If the option is in the money, the in-the-money amount is always worked into the option's price. The more the option is in the money (due to a favorable stock price move, or a more favorable option strike price), the higher its price goes. If an option is out of the money (its strike price is at a disadvantage to the stock price), the closer the stock's price comes to the option's strike price, the higher the option price goes. Thus in our example FAK is more expensive than FAL even though they are both out of the money. But FAK's strike price …
Table of Contents