Part 9 Trading Master Class With Experts

How Option Pricing Works

Option prices are determined by several factors, most notably:

Intrinsic Value – The real value if exercised today (difference between the current price and strike price).

Time Value – The additional amount traders are willing to pay due to the time left until expiration.

Volatility – Higher volatility means higher uncertainty, leading to higher premiums.

Interest Rates and Dividends – These also affect pricing but to a lesser degree.

The most popular model for calculating option prices is the Black-Scholes Model, which uses these variables to estimate fair value.