Factors affecting call and put option price
Is the difference between the underlying price and the strike price. In general, as the price of the underlying increases, the value of a call increases and the value of a put decreases.
The reverse is also true; as the price of the underlying decreases, the value of a call decrease and the value of a put increases. It is a measure of the speed and magnitude of price changes in the underlying. There are two types of volatility that may impact option pricing:.
Option premiums will generally be higher if the underlying exhibits higher volatility, because there is a greater chance that the underlying will move in the intended direction. The premium increases as the option becomes factors affecting call and put option price in-the-money has more intrinsic value. The further an option is in-the-money the more it resembles a long or short stock position For a Long Call and Long Put position respectively.
Options are commonly referred to as wasting assets in that they lose their time value as they approach the expiry date due to the decrease factors affecting call and put option price their embedded time value. In general, an option will lose one third of its factors affecting call and put option price value during the first half of its life and two thirds of its value during the second half. In general, the longer the time to expiry, the higher the option price.
This is because of the potential cost associated with owning the physical stock. The purchaser of a call option is potentially deferring the purchase of the underlying to a future date.
If the money to be used to buy the underlying at expiry is in a bank account waiting to purchase the underlying at expiry the interest income will be lower making it less attractive to buy the call option. Need to speak to someone about companies or investing? Our knowledgeable team is on hand to assist. By submitting your details, you are consenting to be contacted by one of our experienced advisers.
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