How do you calculate stock options?
The price of stock options depends on 5 main factors:
1. strike price in relation to the prevailing price of the stock
2. Dividends
3. Risk free interest rate
4. time to expiration
5. volatility
Item 1 determines the intrinsic value while the other 4 items determines the extrinsic value. Intrinsic value + extrinsic value = price of an option.
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