31 lines
1.6 KiB
Plaintext
31 lines
1.6 KiB
Plaintext
Cl,apter 1: Definitions 9
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TABLE 1-2.
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Comparison of XYZ stock and call prices.
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XYZ July 45 XYZ Stock Over
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Striking Price + Coll Price Price Parity
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(45 + 45 1/2) 1/2
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(45 + 21/2 47 ) 1/2
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(45 + 51/2 50 ) ½
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(45 + 151/2 60 ) 1/2
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FACTORS INFLUENCING THE PRICE OF AN OPTION
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An option's price is the result of properties of both the underlying stock and the terms
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of the option. The major quantifiable factors influencing the price of an option are
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the:
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1.. price of the underlying stock,
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2. striking price of the option itself,
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3. time remaining until expiration of the option,
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4. volatility of the underlying stock,
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5. current risk-free interest rate (such as for 90-day Treasury bills), and
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6. dividend rate of the underlying stock.
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The first four items are the major determinants of an option's price, while the latter
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two are generally less important, although the dividend rate can be influential in the
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case of high-yield stock.
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THE FOUR MAJOR DETERMINANTS
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Probably the most important influence on the option's price is the stock price,
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because if the stock price is far above or far below the striking price, the other fac
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tors have little influence. Its dominance is obvious on the day that an option expires.
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On that day, only the stock price and the striking price of the option determine the
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option's value; the other four factors have no bearing at all. At this time, an option is
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worth only its intrinsic value.
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Example: On the expiration day in July, with no time remaining, an XYZ July 50 call
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has the value shown in Table 1-3; each value depends on the stock price at the time. |