Call Option - Price of Options

Price of Options

Option values vary with the value of the underlying instrument over time. The price of the call contract must reflect the "likelihood" or chance of the call finishing in-the-money. The call contract price generally will be higher when the contract has more time to expire (except in cases when a significant dividend is present) and when the underlying financial instrument shows more volatility. Determining this value is one of the central functions of financial mathematics. The most common method used is the Black–Scholes formula. Whatever the formula used, the buyer and seller must agree on the initial value (the premium or price of the call contract), otherwise the exchange (buy/sell) of the call will not take place. Adjustment to Call Option: When a call option is in-the-money i.e. when the buyer is making profit, he has many options. Some of them are as follows:

1. He can sell the call and book his profit
2. If he still feels that there is scope of making more money he can continue to hold the position.
3. If he is interested in holding the position but at the same time would like to have some protection,he can buy a protective "put" of the strike that suits him.
4. He can sell a call of higher strike price and convert the position into "call spread" and thus limiting his loss if the market reverses.

Similarly if the buyer is making loss on his position i.e. the call is out-of-the-money, he can make several adjustments to limit his loss or even make some profit.