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Describe the 3 factors that affect the size of the premium in an option contract. All...

Describe the 3 factors that affect the size of the premium in an option contract.

All three factors need detailed explanation please!

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Expert Solution

The three factors that affect the size of premium in options contract are as follows :-

1. Underlying asset and the strike price - the movement in the price of assets and their strike price affect the option premium in a way that if the price of a stock has an increasing trend the call premium will rise as it allows you to buy the stock at a predefined price now and if the the prices surpass the strike price you make profit and the vice versa is the case with putt premium.

2. Time to expiration - as the time to expiration of the contract reduces, the premium reduces because their is left time less to exercise the option

3. Implied volatility - is there is more volatility like in today's recessional environment there is more probability of prices going up and down drastically so the call and put premium both rises.

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jeff jeffy answered 1 year ago
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