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What an option consists of

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rapidex

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21 February 2007
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An option consists of the following:

(1) A Strike Price
(2) An Expiration Date
(3) Interest Rates
(4) What the Underlying is doing
(5) Volatility

Is this correct?.

The only thing I need clarification on is number 4. Is it specifically the Price of the underlying, or other factors/variables of the underlying?
 
Dividends

Upcoming dividends, if any, will affect the option price.

Volatility changes will affect option prices as well. For e.g. if there is an announcement due that could cause a gap/volatile move, prices/implied volatilities will go through the roof.

Notice in this volatility chart that IVs raced higher well before the actual realized volatility. This was due to an impending announcement that did move the stock big time, as expected. (although did underestimate the move)
 

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Don't forget exercise type - American or European.
 
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