Question about Out the Money (OTM) call options?

I notice some OTM call options are very expensive compared to others. Yes, OTM.

I am confused why some OTM call options are very expensive compared to others? Is this based solely on historical volatility or how close Delta is close to the value of 1.00?

I googled it but I can't find how OTM options are priced and I am confused on what determines the value of a "essentially" worthless option. Is there anyone that can explain this to me or share a link that explains it? Is there anything that can help determine a "value" OTM call option?

Thanks.

Buy the following book: 'Option Volatility & Pricing' by Sheldon Natenberg. Its a great book that will answer pretty much all of your current and future option questions.

Obviously time has value. The value of an option can be calculated using the Black-Scholes formula.

If you are comparing OTM calls of different instruments, then you are essentially not comparing apples to apples. As BubaYaga rightly mentioned, options are calculated using the Black-Scholes formula mainly. There are other formulas, Whaley, Binomial, etc...But the differences are minor, however, those minor differences make a large impact at certain times under certain circumstances.

The major factor in calculating options prices is volatility. It's the only unknown, everything else is known. So when calculating the price of an option, call or put, you need to estimate volatility. The Black-Sholes pricing model estimates volatility from historical returns & standard deviations (Which has been proven to be close but not accurate), in all cases, this is an estimation & there is no guarantee that the future will be exactly like the past, but anyway.

Back to your question, all stock options imply a certain volatility (Based on Market Makers pricing that you see in front of you). There is also a pattern for expected implied volatility. All options falling within earnings release will have higher implied volatility priced in their formulas and hence they will have higher premiums, since large swings can be expected around earnings releases.

Time has value as well, so an OTM option is purely a time value, i.e. all the premium you pay is for time, with no intrinsic value.

So, for example, if you look at AAPL options, (Apple reports on 24-28 April), April monthly options expire 21-April, so before the release, if you compare 21-April options vs. 28-April vs. May monthly options (19-May), you will find implied volatility higher in 28-April & 19-May vs. 21-April ones. (This is also normal as future expected volatility tends to be higher by default, however, because of the earnings release event, it's higher than normal).

Secondly, an OTM option will never have a delta of 1 or even close. an OTM option will have a delta of anywhere between 0.5 and 0. If it's ATM, then it will be close to 0.5, if it's far OTM, it will be close to 0.

There is a lot of online option calculators where you can plug the inputs and it will calculate the so called theoretical price of a call and a put.

Try them:

http://www.option-price.com/
http://www.fintools.com/resources/on...ns-calculator/
https://www.interactivebrokers.com/w...ns_calculator/

Nader