Pricing and volatility
What moves the price of an option between the day it is traded and the day it expires, and how each effect is measured.
- Delta
Delta is the estimated change in the price of an option for a rise of $1 in the price of the underlying stock. The delta of a call lies between 0 and 1 and the delta of a put between -1 and 0.
- Theta and time decay
Theta is the estimated change in the price of an option as one day passes and everything else stays the same. Time decay is the loss of time value that theta measures.
- Implied volatility
Implied volatility is the volatility that, put into an option pricing model, gives the market price of the option. It is quoted as a yearly percentage and says how much movement of the stock the premium pays for.