By Bayo
We are hoping this to be an easy and simple lesson to introduce options to you. By following Options Basics' articles, you should be able to understand options and how to utilize options to either profit or protect your stock.
The current price of an option is called its premium. It is thus the income received by the seller (writer) of an option contract to another party.
An option premium is stated in dollars and cents per share as its stock price, and most contracts represent the commitment of 100 shares.
So what determines the price of options? Mainly composed of two factors: intrinsic and time(extrinsic) value.
Options that are out-of-the-money(OTM)only have time value, while in-the-money options have both intrinsic and time value.
An option's premium will generally be greater given more time to expiration and/or greater implied volatility. As the option approaches its expiration date, the option's premium stems mainly from the intrinsic value. For example, deep out-of-the-money options that are expiring in one trading day would normally be worth $0, or very close to $0.
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Source: investopedia