abhishreshthaa
Abhijeet S
Introduction to Options
Options Pricing
Primarily two methods used:
Black Scholes method
Cox – Ross method
Find attached calculator
Factors affecting options price:
Stock price
Call options more valuable with the rise in price and less valuable with the fall in price
Put options more valuable with the fall in price and less valuable with the rise in price
Factors affecting options price:
Strike price
Call options more valuable at the lower strike and less valuable at the higher strike
Put options more valuable at the higher strike and less valuable at the lower strike
Factors affecting options price:
Risk free Interest rate
Call option premium increases with rise in interest rates
Put option premium decreases with rise in interest rates
Factors affecting options price:
Time to expiry
Options are more valuable when the time to expiration is more
Factors affecting options price:
Volatility
It is a measure of risk, uncertainty or the variability in the future price of a stock
Higher volatility reflects greater expectations of fluctuations in either direction for a stock
Options are more valuable with increase in volatility
Factors affecting options price:
Not possible to anticipate future volatility, however two ways to estimate the volatility:
- Historical volatility
- Implied Volatility: It is the market’s estimate of how volatile the stock will be from the present up to expiry
Options Pricing
Primarily two methods used:
Black Scholes method
Cox – Ross method
Find attached calculator
Factors affecting options price:
Stock price
Call options more valuable with the rise in price and less valuable with the fall in price
Put options more valuable with the fall in price and less valuable with the rise in price
Factors affecting options price:
Strike price
Call options more valuable at the lower strike and less valuable at the higher strike
Put options more valuable at the higher strike and less valuable at the lower strike
Factors affecting options price:
Risk free Interest rate
Call option premium increases with rise in interest rates
Put option premium decreases with rise in interest rates
Factors affecting options price:
Time to expiry
Options are more valuable when the time to expiration is more
Factors affecting options price:
Volatility
It is a measure of risk, uncertainty or the variability in the future price of a stock
Higher volatility reflects greater expectations of fluctuations in either direction for a stock
Options are more valuable with increase in volatility
Factors affecting options price:
Not possible to anticipate future volatility, however two ways to estimate the volatility:
- Historical volatility
- Implied Volatility: It is the market’s estimate of how volatile the stock will be from the present up to expiry