Learn the stock market › Options › Lesson 7 of 9
What determines an option's price?
Work it out yourself
The calculator starts from Microsoft: the price $531, the close of Nov 6, 2026 rounded, and a volatility of 33%, worked out from the last year's daily moves. The $530 strike is an example. Change what you like.
The model's price: $35.38 per share, $3,538 for a contract of 100 shares.
| If only this changes | The model's price |
|---|---|
| As above | $35.38 |
| Half the time | $25.18 |
| Twice the time | $49.77 |
| Half the volatility | $17.96 |
| Twice the volatility | $70.03 |
Time
The more time is left, the better the chance that the stock moves past the strike, and the dearer the option. But the price grows more slowly than the time: twice the time gives $49.77 instead of $35.38, not twice the price. The reverse also holds, so the value falls ever faster towards the end.
Volatility
A buyer can gain from a large move and loses at most the premium on a small one. That is why an option on a stock that moves a lot is dearer. With twice the volatility the price becomes $70.03 in the example.
Our number shows how the stock has moved. The market prices options by how it expects the stock to move, and the volatility that can be worked out from an option's price is called implied. It can be quite different from the historical one.
What the calculator leaves out
Interest rates and expected dividends also affect the price, but the calculator sets them to zero to show time and volatility more clearly. The price on the exchange is set by buyers and sellers. The model shows how the price hangs together, not what an option costs today.
Test yourself
Two calls have the same strike and the same stock price. One has twelve months left and the other one month. Which costs more?
How the stock has moved: Why did Microsoft move?
Sources
- US Securities and Exchange Commission, An Introduction to Options, updated July 16, 2026: the price against the strike, the time and the volatility.