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How are option prices calculated?

An option's premium is set by six things: the stock's price, the strike, the time to expiry, implied volatility, and, with a smaller effect, dividends and interest rates 1. A pricing formula such as Black–Scholes turns them into a price 2; in the market, the price itself comes from buyers and sellers, and implied volatility is the one input worked backwards from it 3.

A call and a put priced by the Black–Scholes formula (made-up numbers, no dividend). Move any input; start from a $50 stock, $50 strike, 30 days, 30% and 4.3%.

Source: the StrikePath engine, pricing with the Black–Scholes formula 2 at 4.3% interest a year; a simulated example, not market prices. For learning; not advice.

Which way each one pushes

A rising stock lifts calls and lowers puts 1. Time value shrinks as expiry nears, for calls and puts 1. Higher implied volatility lifts both 1. Higher interest tends to raise calls and lower puts, and higher dividends do the opposite 4.

The starting prices

With a $50 stock, a $50 strike, 30 days, 30% implied volatility and 4.3% interest, the formula gives $1.80 for the call and $1.63 for the put 2.

What this shows, and what it doesn't

The formula's prices, for a stock with no dividend 2. Real prices come from trading, quoted as a bid and an ask 5.

Go further

What is implied volatility? →The input worked backwards.What are the option Greeks? →How fast each input moves the price.
Sources (5), checked 20 October 2026 and 27 October 2026
  1. The Options Industry Council, “Options Pricing”. Read it (read 27 October 2026)
  2. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities”, Journal of Political Economy 81(3), 637–654, 1973. Read it (read 20 October 2026)
  3. CME Group, “Implied Volatility”. Read it (read 20 October 2026)
  4. The Options Industry Council, “Put/Call Parity”. Read it (read 27 October 2026)
  5. US Securities and Exchange Commission, Investor.gov, “Types of Orders”. Read it (read 20 October 2026)

Now try it on a scenario of your own

Pick where a simulated stock might be, and by when: drag one dot and see, side by side, what buying shares, one option, or a pair of options (a call or put spread) would each do. Free, no sign-up.

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