ELEMENTS OF AN OPTION PRICE
An option price is composed of several elements:
- Intrinsic value: the amount by which an option is in-the-money, if at all.
- Time value: the value an option has due to the possibility of future price movements and the time remaining until expiration.
- Volatility: the uncertainty in the size and frequency of price changes in the underlying asset.
- Interest rate: the cost of borrowing the underlying asset, if applicable.
- Dividend: the expected dividends on the underlying asset, if applicable.
- The exercise/Strike price
- The underlying price
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