There are four major factors affecting the price of an options contract:

      The price of a futures contract relative to the options strike price:

      The most important influence on an option's price is the relationship between the underlying futures price and the option's strike price. Depending upon futures prices relative to a given strike price, an options contract is said to be at-the-money, in-the-money, or out-of-the-money. An options contract is at-the-money when the strike price is the closest to the price of the underlying futures contract. See the table below for further explanation of the terms in-the-money, at-the-money, and out-of-the-money options.

      Time remaining before options expiration:

      The time premium is the amount buyers are willing to pay for the options contract above its intrinsic value on the chance that, at some time prior to its expiration, it will move into the money. Out-of-the-money options all carry time premium since their intrinsic value is zero, as is that of at-the-money options. The time value of an options contract shrinks as the expiration date approaches, with less and less time for a major change in market opinion, and a decreasing likelihood that the options contract will increase in value.

      Volatility of underlying futures price:

      Volatility measures the market's movement within a price range; the direction of the range is irrelevant. As volatility increases, so does the value of options, all else remaining equal.

      Interest rates:

      Interest rates have a bearing on options prices because they represent the profit or cost that could result from an alternate use of the funds used for the premium. Most of the interest rate effect will already be incorporated in the futures price through the cost of carrying the physical commodity.

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