Part 7 Trading Master Class

How Option Pricing Works

The price of an option (premium) depends on many factors:

1. Underlying Price

If the market moves in the option’s direction (up for call, down for put), the premium rises.

2. Strike Price

Closer the strike to current price, higher the premium.

3. Time to Expiry

More time → higher premium (more chances of movement)

4. Volatility

Higher volatility → higher premium.

5. Interest rates and dividends

These have minor effects but still influence pricing models.