How to calculate an option premium

Written by perriann rodriguez
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How to calculate an option premium
Newspapers and financial websites facilitate calculating an option premium. (Duncan Smith/Photodisc/Getty Images)

An option is a contract giving its owner the right to buy (a call option) or sell (a put option) a fixed number of shares of a common stock at a fixed price at any given time on or before a given date. The six factors that have the greatest influence on the value of an option include current share price, strike price, time to expiration, stock volatility, interest rates and cash dividends. The actual computation of a premium is a complex mathematical process. There are many online financial websites that allow for a simpler way to calculate an option premium.

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Things you need

  • Internet connection

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Instructions

  1. 1

    Find the price of the shares. Visit a financial website, such as MSN Money or Yahoo Finance, or look up the shares in the newspaper. Enter the share name or symbol into the "get quote" search box on the website. To calculate the call option premium, you must know the current share price. Many financial websites have delayed quotes. Real-time quotes are available for a small monthly fee.

  2. 2

    Find the strike price. You can find the strike price in the options section of any financial website. Different shares have different strike prices loosely based on the last year's value of the stock. Strike price is the price at which the owner of the option has the right to buy or sell that share at any given time.

  3. 3

    Calculate a call premium. Subtract share price from strike price to get the intrinsic value. For a call option the difference between the current share price and the strike price of the option is the intrinsic value of that call option. Any value above the intrinsic value is its premium. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero. At expiration the premium for both call and put options is zero.

    share price - strike price = intrinsic value

  4. 4

    Calculate a put option premium. Subtract the strike price from the share price. For a put option the difference between the strike price and the current share price is the intrinsic value of that put option. Any value above that is its premium.

    strike price - share price = intrinsic value.

    Time to expiration and stock volatility are two of the factors that have the most influence on the value of an option premium.

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