Stocks move up or down mostly based on company performance and market conditions. Options respond to several factors simultaneously:
Underlying Asset’s Price:-
The most direct influence is movement in the underlying stock or asset. When a stock’s price rises, call options generally become more valuable while put options typically lose value. The opposite occurs when stock prices fall.
Time Decay:-
Like a melting ice cube, options lose value as they approach their expiration date. This process of time decay accelerates in the final weeks before expiration, particularly for at-the-money options. This erosion is inevitable and affects all options.
Market Volatility:-
Just as home insurance costs more in hurricane-prone areas, options become more expensive when markets are volatile or are expected to be.
Implied volatility is the market’s view of the likelihood that an asset’s price will change. Thus, higher volatility means higher option prices, regardless of whether you’re buying calls or puts.
The Options Industry Council. “Volatility & the Greeks.”
Interest Rates:-
While usually less significant than other factors, interest rates affect options pricing. Higher rates typically make call options more expensive and put options cheaper, though this effect is most noticeable in longer-term options.