Option premium pricing is extremely complex algorithm and you are not going to understand it. So I am going to explain in the simplest way possible.
There are 6 factors which effect option premium:
Underlying Price
Contract Strike Price
Contract Expiration Date
Interest Rate
Dividends
Volatility
I will not dive into these but you can read more about them here: https://www.elearnmarkets.com/school/units/basics-of-options/factors-affecting-option-premium
Without accounting for volatility, interest rates, dividends, and expiration date this is how options are priced:
AAPL is trading at $100 per share. We think price will rise to $105 so we buy $100 Calls expiring today for $1.00.
If price hit’s $105, we can expect premium to reach $5.00.
Why?
$105 underlying – $100 Strike Price = $5.00 Premium
Remember, what 1 option contract is. It is the right to buy 100 shares of said underlying at said strike price by said expiration date.
