Determinants of option value

The following components determine the value of an option:

1. Variables Relating to Underlying Asset
   1. Value of Underlying Asset
      1. as this value increases, the right to buy at a fixed price (calls) will become more valuable and the right to sell at a fixed price (puts) willbecome less valuable.
   2. Variance in that value
      1. as the variance increases, both calls and puts will become more valuable because all options have limited downside and depend upon price volatility for upside.
   3. Expected dividends on the asset
      1. Which are likely to reduce the price appreciation component of the asset, reducing the value of calls and increasing the value of puts.
2. Variables Relating to Option
   1. Strike Price of Options; the right to buy (sell) at a fixed price becomes more (less) valuable at a lower price.
   2. Life of the Option; both calls and puts benefit from a longer life.
3. Level of Interest Rates; as rates increase, the right to buy (sell) at a fixed price in the future becomes more (less) valuable.