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Last updated: 09/01/2024, 9:15AM

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Options Premium Analysis

Watch here, How to use Options Premium Analysis?

What is Options Premium Analysis?

Options Premium Analysis involves assessing the factors that determine the price of options contracts. There are six key elements that influence the premium:

  • Underlying Index/Future Price : The current price of the underlying asset, such as a stock index or futures contract, significantly impacts the option premium.
  • Rate of Interest : Interest rates affect the cost of holding options, thus influencing their premiums.
  • Strike Price : The specified price at which the option can be exercised significantly affects the option premium.
  • Time to Expiry : The time remaining until the option contract expires plays a crucial role in determining the premium.
  • Implied Volatility (IV) : IV reflects the market's expectation of future price fluctuations. Higher IV generally leads to higher option premiums, while lower IV results in lower premiums.
  • Dividend : For certain assets, dividends can influence option prices, particularly for options that expire around the dividend payment date.

Options Premium Calculation

On the TalkOptions website, traders can perform calculations to estimate the projected premium of options based on IV or the premium itself. Here's a live example using both calculation methods:
Premium Calculation Method : Suppose a trader bought a Call option with a strike price of 18700 for Nifty at a premium of 80 rupees, expiring on 29th June 2023. By adjusting sliders for the underlying price, IV, and expiry date, the website provides the projected option price on the expiry day, revealing the potential outcome of the trade.
IV Calculation Method : For another example, let's say a trader purchased a Put option with a strike price of 18800 for Nifty at a premium of 136 rupees, expiring on 29th June 2023. By sliding the premium and the expiry date, the website computes the implied volatility (IV) and other Greek values for the option, providing insight into future price expectations.

Importance of Options Premium Analysis

The tool allows traders to explore future projected premiums and IVs. For those seeking the option price for their chosen strike price, the premium calculation method is appropriate. Conversely, for those interested in future IV and delta values, the IV calculation method provides valuable information. The website covers projected premiums for both index and stock options, along with future IV and delta values. Traders can leverage these tools to make more informed decisions and gain insights into potential outcomes for their options trades.