To calculate the Option Premium (P):
\[ P = IV + TV \]
Where:
An option premium is the price that a buyer pays to the seller to acquire the right, but not the obligation, to buy or sell an underlying asset at a specified strike price before or at the expiration date. The premium is composed of two main components: intrinsic value and time value. The intrinsic value is the difference between the underlying asset’s current price and the option’s strike price. The time value represents the additional amount that traders are willing to pay for the possibility that the option will increase in value before its expiration date. The option premium is influenced by various factors, including the underlying asset’s price, volatility, time to expiration, and interest rates.
Let's assume the following values:
Using the formula:
\[ P = 10 + 5 = 15 \text{ dollars} \]
The Option Premium is $15.
Let's assume the following values:
Using the formula:
\[ P = 20 + 8 = 28 \text{ dollars} \]
The Option Premium is $28.