EZ Trader – Options
Pricing Options EZ Trader Review
When you buy or sell options on currencies and other assets underlying the premium (option price) is calculated automatically according to various mathematical formulas. It is expressed in the amount of (the base) or the percentage of the nominal value of the option.
Intuitively, the price of an option reflects the probability of exercising this: the more this probability is higher, the option will be expensive. Several factors affect the price of the option, including:
* The difference between the cash price of the underlying price (current) and the exercise price (this difference is called the intrinsic value).
* The remaining time and “time value”. In general, the longest maturity fell option is remote, plus the premium is high. Similarly, the value of an option decreases when approaching the deadline, because the chances of coming into force decrease.
* The market volatility. This is one of the most important factors determining the price of a currency option. Volatility measures the price movement of the pair behind the spot market. In times of high volatility, the probability that the option expires in the money “is greater. This means that the seller of the option has a greater risk in exchange for this risk requires a higher premium. In general, the higher the volatility, the higher the option (to buy or sell) is expensive. The price of an option, there are two types of volatility: implied volatility, which corresponds to market expectations and historical volatility, which refers to changes of the past as an asset.
The option value is also affected by other factors such as interest rates and other market conditions, but less. The evaluation of the theoretical value of European options are generally based on the Black-Scholes and or Binary Options.
The total price of an option’s intrinsic value corresponds to a time value.
The intrinsic value: To what extent the option is “in the money (the difference between the exercise price and the price of the underlying asset. It is the profit that would accrue if the option is exercised immediately. When zero, the option is considered “out of money.”
The time value or extrinsic value: the value of an option beyond the intrinsic value. In other words, this value corresponds to the difference between the premium and intrinsic value, and reflects the value of the probability that the option is on the money “between now and maturity, and therefore the value given by the buyer and seller in the time remaining until option expiration. This calculation is based on several factors including price volatility and the underlying cash and time to maturity. nears maturity, the value time approaches zero. Therefore, an option to exchange two months due to cost more than the same option in a contract month, as the underlying current has more time to possibly change in a positive direction. And this time also, the seller receives a higher premium.
