How does option value calculated

If you trade options, you need to understand how options value is calculated. By knowing that, you will understand what affect the option value. This will help you in trading. It is just like business. To buy and sell something and make profit you need to know the fair price of the product. Basically, option value is determined by two variables: intrinsic value and time value. The intrinsic value is the value that an option has if it is executed. Only In the Money option (ITM) has intrinsic value, because when you execute the option there is a positive spread between current price and option strike price. For example, stock XYZ current price is $ 100. A Call Option at $ 90 strike price has $ 100-$ 90 = $ 10 intrinsic value. At the Money (ATM), and Out of the money (OTM) options has zero intrinsic value. Because ITM has intrinsic value, it is more expensive. It is a basic thing you need to know. The second thing that influences option value is time value or the time an options needs to expire. If it has more time to expire, it will have more time value and more option value. So time really is money. When option is near expiration date, it's time value will reach zero or almost zero. The time value erodes the fastest when it is within 30 days of expiration date. It is wiser if you buy option with expiration date more than 60 days, otherwise you will just like burning money each day when it is nearly expire. Options with longer expiration date are more expensive because they have this time value. More time means more chances for your option to go right. Another tip is to sell your option one month before it expires to get better price. There is a variable that measures how fast an option lost its time value. It is called Theta, one of option Greeks. Theta provides estimate dollar value of an option that will be lost each day because of time decay. Positive Theta means option value will increase as time passes. Negative Theta means option value will decrease as time passes. So long call and long put have negative Theta and the value will decrease as time passes. Time is your enemy if you have long call and long put. If you are writing call or put option, time is your friend and it has positive Theta.