When you buy option, what is the cost based on?
Answers
148 points
KenTrester answered 3 months ago …
The price of an option typically correlates to the stock price, with other important factors such as volatility (i.e., fear and momentum in both the stock and the option itself), how much time an option has till expiration, how deep in-the-money (or how far out-of-the-money) the strike price is, and other “mysterious” factors like delta, gamma, theta and other “Greeks” that our analysts are looking at.
It’s fair to say that, even though each trader arrives at their respective recommendations very differently, they are all examining the bid and ask prices of each individual option that they are considering.
The bid/ask spread gives you a good idea of what the option is worth right now because the bid price is what potential buyers are willing to pay to buy, and the ask price is what the people who have the options want to sell them for. If a stock or option is on the move, check out its options for a price you feel comfortable paying, and prepare to pay the ask price or a nickel or dime above it.
You can always put in a limit order with your broker, telling them how much you want to pay (i.e., that would be your bid price) and see if anyone is willing to fill your order at that price. If not, you’ll pay the ask price to enter the trade you want to be in.
152 points
Prudent answered 3 months ago …
want a simple answer ? Its the risk premium the broker offers you.
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726 points
alanj answered 3 months ago …
Prudent is not correct. The premium is set by another investor. It's an amount the other investor (seller) is willing to sell the option to you. The premium that you pay goes to the seller not the broker. The broker only makes a small commission on the transaction.
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