Options Premiums
Option premiums are determined the same way futures prices are determined, through active competition between buyers and sellers. There are three major factors that influence the premium for a given option. First is the option's exercise price. Options that are worthwhile to exercise will demand a higher premium that one that is not yet worthwhile to exercise. The second influence is the length of time remaining until expiration. Options with longer period of time's remaining before expiration will command a higher premium than those with shorter expiration times. They basically have more time to become profitable. Volatility of the underlying futures contract is the third factor. The higher the volatility, the higher the option premium. Volatile markets give options a larger chance of becoming profitable to exercise.The Motley Fool is a great source for all kinds of investing knowledge.
