Futures Options Pricing and CME Options Course
Today’s markets are full of options. Discover how options on futures from CME Group can help you mitigate downside risk and diversify your portfolio across major asset classes such as interest rates, equity indexes, foreign exchange, energy, agriculture and metals.
What determines the pricing of an option?
The difference in the price of the underlying future to the strike price of the option determine the option's intrinsic value. The time remaining until expiration and the volatility of the underlying future determine the option's time value. Time value and intrinsic value together determine option price.
Intrinsic Value Time Value = Option Price
The most important influence on an options price is the price of the underlying future. For example, if a futures market is trading 95 on expiration, a 100 call expires worthless. On the other hand, a 90 call is worth at least 5 points. The closer the option gets to expiration, the faster it decays. The rate of decay is related to the square root of the time remaining. An option with two months remaining decays at twice the speed of an option with four months remaining.