How is an option valued?

by Toby Smith   06/30/08
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Q: I'm new to options trading, and I don't understand how an option is valued.

A: There are five elements that affect the value of an option: cost of the underlying stock, the option's strike price, time left in the options expiration cycle, volatility and whether it is a call versus a put.

Other elements, such as dividend payouts and interest rates, matter as well, but they usually affect price on an intuitive basis.

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