Pricing of Options

[aarun3034]

Hi!
I have never traded in options. I would like to ask a few questions about this:
(1) Who decided the prices of options
(2) I suppose options are contracts. Let us assume I buy a call option for the stock "ABC". This means I have the right to buy the said option at some particular price on or before the expiry date. Now this is some sort of a contract.I would like to know whether it is the stock exchange which gives mr this right or someone else?
Can anybody comment.

 

[Traderji]

Hi!
I have never traded in options. I would like to ask a few questions about this:
(1) Who decided the prices of options

The price of an option are based on a number of inputs, including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility.

Intrinsic value and time value are two of the primary ingredients that go into an option's price.

Intrinsic value is the extent to which the strike price of an option is in-the-money.

Time value, occasionally known as extrinsic value, is defined as the amount by which an option's price exceeds its intrinsic value; time value declines over time it is less and less relevant as expiration approaches. In fact, upon expiration, an option can be worth only its intrinsic value.

The deeper an option is in-the-money, the more intrinsic value (and less time value) it has. This is when you can expect the option to move more like the underlying stock it's representing.

Call Options
Intrinsic value = Underlying Stock's Current Price - Call Strike Price
Time Value = Call Premium - Intrinsic Value

Put Options
Intrinsic value = Put Strike Price - Underlying Stock's Current Price
Time Value = Put Premium - Intrinsic Value

 

[Traderji]

(2) I suppose options are contracts. Let us assume I buy a call option for the stock "ABC". This means I have the right to buy the said option at some particular price on or before the expiry date. Now this is some sort of a contract.I would like to know whether it is the stock exchange which gives mr this right or someone else?
Can anybody comment.

The seller of the option gives you the right (by selling you the option and collecting the premium from you) and the exchange (NSE) guarantees it.

 

[trader9]

Hi!
Want to know more about options check out
Yahoo! options education
Chicago Board of Options Exchange

or Indian sites
HDFC intro to derivatives (pdf file)
derivativesindia.com
Moneycontrol.com

Happy learning
Regards!