Chapter 05 · Section 5.1
Relationship between the premium and the price
What is the relationship between the premium and the price of the underlying?
a) The premium of the option will move up or down by the same amount as the price of the underlying.
b) There are many factors which influence the change in the premium relative to the price of the underlying.
The premium consists out of two parts: intrinsic value and time value.
As the option approaches the expiration date, the time value decreases, making the intrinsic value a greater proportion of the premium.