The option premium is determined by which of the following?
A)the volatility of the price of the financial instrument
B)the difference between the strike and the spot price
C)the length of time until the expiration date on the option
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The option premium is determined by all three factors: the volatility of the price of the underlying financial instrument, the difference between the strike and the spot price, and the length of time until the expiration date on the option. Volatility measures how much the underlying asset's price fluctuates, which affects the likelihood of the option being profitable. The difference between the strike and spot prices determines how close the option is to being "in the money" and therefore affects the option's worth. Finally, the longer the time left until the option expires, the more time the option holder has to profit, which also affects the premium price.

The Option Premium Is Determined by Which of the Following