RSM332 Option Prices Determinants

Stock Price (S)

Call value increases when S ↑; Put value decreases when S ↑

Strike Price (X)

Higher X makes Calls cheaper; Higher X makes Puts more expensive

Volatility (σ)

Higher σ increases both Call and Put prices (more chance to finish in-the-money)

Interest Rate (r)

Higher r makes Calls more expensive (buy later is cheaper); Higher r makes Puts cheaper (sell later is worse)

Time to Expiration (T)

Longer T increases option prices (more time value); as time passes, Theta decay reduces option value