InvestorQ : Who decides on the premium paid on options & how is it calculated?
Bhavik Nehru made post

Who decides on the premium paid on options & how is it calculated?

Answer
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Bhavik Nehru answered.
2 years ago


Options Premium is not fixed by the NSE or the BSE. The fair value/ theoretical price of an option can be known with the help of pricing models and then depending on market conditions the price is determined by competitive bids and offers in the trading environment. An option's premium / price are the sum of intrinsic value and time value. If the price of the underlying stock is held constant, the intrinsic value portion of an option premium will remain constant as well. Therefore, any change in the price of the option will be entirely due to a change in the option's time value. The time value component of the option premium can change in response to a change in the volatility of the underlying, the time to expiry, interest rate fluctuations, dividend payments and to the immediate effect of supply and demand for both the underlying and its option.