What does sensitivity analysis assess in options trading?

Sensitivity analysis is an essential tool in options trading that evaluates how variations in underlying factors such as the price of the underlying asset, volatility, interest rates, and time decay affect the pricing of options. This analysis helps traders understand the potential expiration value of options under different scenarios, allowing them to make informed decisions based on market conditions.

The primary purpose of conducting a sensitivity analysis is to gauge the relationship between an option's price and several influencing factors, commonly referred to as the "Greeks." For instance, delta measures how much the option's price is expected to change with a small change in the underlying asset’s price, while vega indicates sensitivity to volatility changes. By interpreting these metrics, traders can better anticipate how option prices may respond to market fluctuations.

Other choices do not align with the primary goal of sensitivity analysis. While minimizing trading risks, understanding regulations, or calculating premiums are all important aspects of options trading, they do not specifically pertain to the examination of the impacts that underlying factors have on option pricing. Sensitivity analysis stands out as a focused approach to comprehensively assess these price changes, providing valuable insights for options traders.