This price can be split into two components. Otherwise the intrinsic value abcs of black history pdf zero.
50 advantage even if the option were to expire today. 50 is the intrinsic value of the option. The option premium is always greater than the intrinsic value. This is called the Time value.
Time value is the amount the option trader is paying for a contract above its intrinsic value, with the belief that prior to expiration the contract value will increase because of a favourable change in the price of the underlying asset. The longer the length of time until the expiry of the contract, the greater the time value. There are many factors which affect option premium. These factors affect the premium of the option with varying intensity.
An increase in the underlying price increases the premium of call option and decreases the premium of put option. Reverse is true when underlying price decreases. Strike price: How far is the strike price from spot also affects option premium. 5000 to 5100 the premium of 5000 strike and of 5100 strike will change a lot compared to a contract with strike of 5500 or 4700. Volatility of underlying: Underlying security is a constantly changing entity.