Question

4. Please name and explain the five components of the option price

PLEASE WRITE THE ANSWER IN YOUR OWN WORDS BECAUSE I HAVE TO SUBMIT THIS ON TURNTIN

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Value of a option = Intrinsic Value + Extrinsic Value.

Intrinsic Value:

1. Stock price. Factors: Delta & Gamma.

Delta: it is the rate of change of option with respect to share price, other factors remaining constant.

Gamma: it is the rate of change of delta with respect to share price, other factors remaining constant.

2. Strike price.

Extrinsic Value:

3. Time. Factor: Theta, it is the rate of change of option with respect to time, other factors remaining constant.

4. Volatility. Factor: Vega, it is the rate of change of option with respect to volatility, other factors remaining constant.

5. Risk-free rate. Factor: Rho, it is the rate of change of option with respect to the risk-free rate, other factors remaining constant.

The premium increases depending upon the call option/put option:

For a Call option, there is an increase in premium with an increase in:

1. Underlying asset price.

2. Time to Expiration

3. The volatility of the Underlying.

For a Put option, there is an increase in premium with an increase in:

1. Stike price

2. Time to Expiration.

3. The volatility of the Underlying.