Extrinsic value--dependable factors

#1
Dear Traderji,

As per my little knowledge,

option premium=intrinsic value + extrinsic value.

extrinsic value depends on
1)days remain for expiry--as days reduces,extrinsic value reduces.
2)implied volatility
3)open interest

Q.
what are the relations between A)extrinsic value and implied volatality
B)extrinsic value and open interest.
C) and other factors on which extrinsic value depends?

please post your valuable comments.
 

Traderji

Super Moderator
#2
Option premium is the price at which an option trades. It has two components:

Intrisic value + Time value

The option premium is primarily affected by the difference between the stock price and the strike price, the time remaining for the option to be exercised, and the volatility of the underlying stock.

Affecting the premium to a lesser degree are factors such as interest rates, market conditions, and the dividend rate of the underlying stock.

Because the value of an option decreases as its expiration date approaches and becomes worthless after that date, options are called wasting assets.

The total value of an option consists of intrinsic value, which is simply how far in-the-money an option is, and time value, which is the difference between the price paid and the intrinsic value.

Understandably, time value approaches zero as the expiration date nears. also called option price.
 
#3
Taking the example of:

NIFTY 31MAR2005 CE 2050.00 which is currently trading at 68.25 with the underlying value of the Nifty being 2057.30

As we know that the Option premium is the price at which an option trades. It has two components:

Intrisic value + Time value

Taking the above example:
7.30 + 60.95

Intrinsic Value(7.30) is = 2057.30 (underlying value) - 2050.00 (Strike Price)

The rest of the premium makes up the time value.
 

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