InvestorQ : Do I understand right that the option value will be determined by the stock price?
sara Kunju made post

Do I understand right that the option value will be determined by the stock price?

Answer
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Aashna Tripathi answered.
2 years ago


Stock price is one of the factors that impact option values but there are a lot many more factors. When we look at the factors influencing the value of options then the stock price and the strike price are the obvious factors. But the most important factor impacting options prices is volatility. Volatility and time to maturity will make the put options and call options more valuable. That is because options benefit from volatility. If volatility is in your favour then you make money and if volatility is against you then you only lose the premium paid. As simple as that! Secondly, interest movements also influence option values as they reduce the present value of the strike price and make call options more attractive when interest rates go up. The reverse logic applies when the interest rate goes down. It is only volatility and time that influence both calls and puts in the same manner.