Option Price Behaviour

1. Strike Price – if the stock price don’t move beyond the strike price, then the option will expire worthless

2. Time to Expiration (time decay) – the longer the time, the higher the option price

– the most time decay happens as option is near expiry

3. Effect of Interest Rate on short- term options prices is small

rise in i/r –> rise in CALL, drop in PUT

4. Dividends

– rise in Dividends –> drop in CALL
                              –> rise in PUT

A stock that pays dvds is more valuable than one that does not. Hence, the cost to insure the stock against price drop will be more expensive (PUT) .

and if PUT is more expensive, the CALL is cheaper.

5. Volatility

– wider range in stock price –> represents higher volatility

Cboe – IVolatility Services – option calculator to see how option prices are impacted by the variables

6. Implied Volatility

– expectations about the future volatility

– How to find IV –> work backwards using B-S model/ any Online Option Pricing CalculatorRecommendation
Visit Cboe IV Index for prices.

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