Option prices are largely influenced by their intrinsic value: the underlying price, and the strike price. However, what effect do other factors have, including option demand? Is this ever reflected in option pricing?

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    Are you looking for a quantifiable answer? Certainly supply and demand affect option prices. – D Stanley Oct 1 '18 at 15:40

Change in the underlying's price affects both intrinsic and extrinsic value unless the option is 100 delta and then, it only affects intrinsic value.

Demand for options increases implied volatility which in turn increases extrinsic value.

Carry cost and dividends also affect premium.

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    Demand for options doesn't just affect implied volatility; because market makers and arbitrageurs hedge with the underlying, differential demand for calls vs. puts can move the underlying consistent with calls and puts moving in different directions. – nanoman Oct 1 '18 at 16:57
  • @nanoman do you think you could explain this more simply? What do you mean by (1) because market makers and arbitrageurs hedge with the underlying and (2) what is differential demand for calls vs. puts. – JDM Oct 1 '18 at 17:39
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    Some research has concluded that option trading has no significant impact on price volatility of the underlying and its effect, if any, is toward decreased price volatility while stabilizing the underlying market. The notable effect is increased variability in daily share volume once option trading begins. – Bob Baerker Oct 1 '18 at 18:01
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    Saying that demand affects implied volatility and therefore affects option prices is a catch-22. Implied volatility is calculated based on prices, not the other way around (you know this; I'm just trying to see if the argument could be made differently). – D Stanley Oct 1 '18 at 18:23
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    @JDM If traders expect high volatility in the underlying and think options are generally underpriced, they will bid up both calls and puts; this corresponds to an increase in implied volatility. It may have no direct effect on the underlying if those calls and puts are hedged with equal long and short positions in the underlying. But if there is demand specifically for, say, calls to make a bullish bet, then as the calls rise, other traders will arbitrage by selling them and going long the underlying; i.e., the bullish demand gets communicated to the underlying. Puts may then fall as a result. – nanoman Oct 1 '18 at 19:57

Other factors. The movement pattern (volatility) of the underlying would be the biggest factor. Even if an option does not trade, a change in movement pattern (volatility) of the underlying will have an enormous effect on how the option will be priced. Rarely are options priced far from the actual volatility of the underlying (corresponding to the term of the option). This becomes particularly true with longer-term options.

I should mention, obviously intrinsic, as you stated, but I never think about intrinsic. For me, an in the money call is a put, and an in the money put is a call.

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