Class: Options Pricing
OIC Education Program

Introduction (1 of 3)

The goal of this class is to introduce investors to the factors that affect any listed equity option's price in the marketplace. While the effect of a change in any one of these factors may be examined in isolation, the sum effect of them all is a dynamic one. Most of these factors can and often do change during an option's lifetime, with some fluctuating in value on a continuing basis during any trading day.

Certain of these factors may be quantified:

Underlying Stock Price Strike Price
  • Volatility
  • Time to Expiration
  • Dividends
  • Interest Rate
  • Understanding the effect that a change in any particular factor can have on the premium, or price, of a call or put can reduce surprises about the price behavior of an option position in a dynamic marketplace. And with the use of an option pricing model, specific values for each of these six factors may be used to predict an option contract's theoretical value at a given point in the future.

    The accuracy of any theoretical value generated with a pricing model has its limitations. The principal one being how option prices are actually determined in the open marketplace. Just as with any competitive securities market they reflect the current consensus of bids and offers from all investors, professional and individual alike.