The underlying stock price is normally the most significant factor affecting the price of an option. As mentioned earlier, in-the-money options enable holders to buy or sell the underlying shares at a better price than the prevailing market price. They therefore cost more than the equivalent at-the money and out-of-the-money options because there is more value in them. And whether an option is in-the-money
depends solely on the underlying price because the strike price is fixed. The difference between the strike price of an in-the-money option and the market price of the underlying stock is called the intrinsic value. For example, a call option with a strike price of $45 when the underlying market price is $50 has an intrinsic value of $5. However, it is possible that the option in this case will be traded above $5. Even out-of-the-money and at-the-money options, which have no intrinsic value, will normally have some value. This is because there are other factors determining the value of the option. These are called “extrinsic” factors. The extrinsic factors are time until expiration, dividend expectation, interest rate and volatility.
underlying market price
The underlying stock price is normally the most significant factor affecting the price of an option. As mentioned earlier, in-the-money options enable holders to buy or sell the underlying shares at a better price than the prevailing market price. They therefore cost more than the equivalent at-the money and out-of-the-money options because there is more value in them. And whether an option is in-the-money
depends solely on the underlying price because the strike price is fixed. The difference between the strike price of an in-the-money option and the market price of the underlying stock is called the intrinsic value. For example, a call option with a strike price of $45 when the underlying market price is $50 has an intrinsic value of $5. However, it is possible that the option in this case will be traded above $5. Even out-of-the-money and at-the-money options, which have no intrinsic value, will normally have some value. This is because there are other factors determining the value of the option. These are called “extrinsic” factors. The extrinsic factors are time until expiration, dividend expectation, interest rate and volatility.