The most important of these factors are the price of the underlying stock, time remaining until expiration, the volatility of the underlying stock price, cash dividends, and interest rates. The value of an option depends heavily upon the price of its underlying stock. There are other factors which give options value and therefore affect the premium at which they are traded. Together, these factors are termed time value. The primary components of time value are time remaining until expiration, volatility, dividends, and interest rates.
Time value is the amount by which the option premium exceeds the intrinsic value.
Time value drops rapidly in the last several weeks of an option's life. Volatility Volatility is the propensity of the underlying security's market price to fluctuate either up or down. Therefore, volatility of the underlying share price influences the option premium. Dividends Regular cash dividends are paid to the stock owner. Therefore, cash dividends affect option premiums through their effect on the underlying share price.