D. Option Premiums (continued)
2. Affected by
- a. The Security Price
- Premiums are directly related to the relative magnitude of the security price since the risk of price change is a function of the price.
- Example: Stock A: P = $100
Stock B: P = $10
- Loss potential as a result of changes in security price is greater for Stock A and hence, the option writer will require a greater premium.