Generally speaking, option premiums, or prices, represent how likely it is that you can profit from exercising the option 💰

So an option that has a higher chance of being profitable will be more expensive, and an option that has a lower chance of being profitable will be cheaper.

One big factor affecting how likely an option will be profitable is the difference between its strike price and the current stock price 💡

If the current stock price is very close to – or already exceeds – the strike price of an option, the option premium will typically be higher, because it’s more likely that you can exercise the option!

But if the current stock price is far away from the option’s strike price, the option premium will typically be lower, because it’s less likely that you can exercise the option for a profit 💀

Remember time decay?

The closer the option’s expiration date, the cheaper the option typically is 🛍️

This is because as the expiration date approaches, there’s less time for the stock’s price to change, and therefore a lower chance that the option will become profitable ⏰

Meanwhile, options with a far away expiration date are often more expensive since there’s more time for the stock price to change and a higher chance the option becomes profitable ⏳

Lastly, volatility is a key factor: if a stock’s price is very volatile, the option premium will be higher since it’s more likely the stock price changes for the option to be profitable ⚡

Ultimately, option pricing is a topic that has had thousands of books and papers written about it, so this lesson is just a brief introduction to the world of option pricing 📚