An option premium is a positive function of:
A) Time to expiry
B) The volatility of the price of the underlying commodity
C) The moneyness of the option
D) All of the above

Question

Quizplus · Accepted Answer

All three factors - time to expiry, volatility of the price of the underlying commodity, and the moneyness of the option, have a significant impact on the option premium. The longer the time to expiry, the higher the premium as there is more time for the underlying price to move in favor of the option holder. Higher volatility also leads to higher premiums, as there is a greater likelihood of the price moving in favor of the option. The moneyness of the option, i.e. the strike price in relation to the current market price of the underlying commodity, also affects the premium, with the prices for in-the-money and at-the-money options being higher compared to out-of-the-money options.

An Option Premium Is a Positive Function Of