The price of an option can be influenced by a number of factors, each of which can either help you or hurt you depending on the type of option position you have established. To become a successful option trader, it is therefore essential to understand what factors influence the price of an option.

Understanding price influences requires learning about the so-called "Greeks" - a set of risk measures that indicate how exposed an option is to price influences, principally time-value decay, implied volatility, and changes in the underlying price of the commodity. In this document, I will discuss four risk measures--Delta, Theta, Vega, and Gamma--and explain their importance. But first, I will review some related option characteristics that will help you better understand the Greeks.

There are three principal factors that affect the price of an option:

1. the price of the underlying asset – as the price of the underlying asset goes up, the price of a call option will go up and the price of a put option will go down
2. Volatility – there is a direct relationship between volatility and the price of all options (both puts and calls). If volatility goes up, the price of both puts and calls go up.
3. time to maturity – the longer the time to the maturity of the option, the more valuable the option (both puts and calls)

Bear in mind that this abstracts from whether you are long or short an option. Naturally, if you long a call option, a rise in implied volatility will be favourable since rising implied volatility typically gets priced into the option premium. But if you have established a short call option position, a rise in implied volatility would have an inverse (or negative sign) effect. The writer of a naked option, be it a put or call, would therefore not benefit from a rise in volatility since writers desire the price of the option to decline.