When buying or selling options, there is a system used in the market by which the market gives a price for any option. Frankly it’s not important that you know exactly how to calculate it, but rather what variables go into the model. Six out of the seven factors used in valuing options are known, and the last – Volatility – is supposed to be an estimate. Since volatility holds a lot of weight in valuing an option, and we always have to use an “estimate” it makes it impossible to calculate the true value of any option. This is because the call option is now much closer to being ITM at $49 than it was if it was trading at $40.
Of course you would always prefer the right to buy stock at a lower price any day of the week! Stocks that are volatile go through more frequent strike price levels than the non-volatile stocks.


Thus an option on a volatile stock is much more expensive than one on a less volatile stock. We all know that consumer demand, seasonal changes, crude oil prices, refinery productivity, state and local taxes, etc all affect the price you pay at the pump. As any other finance professional will tell you, calculating this by hand back at the universities is painful and tedious but does help you understand what can affect option pricing. More specifically, it’s the future volatility used in the model which makes it very hard price the option.
Strike Price – This is the price at which a call owner may purchase stock, and the put owner may sell stock. Dividends – If a stock trades without giving the stockholder any dividend, it is said to be ex-dividend and its price goes down by the dividend amount.
Remember that even a small change in the volatility estimate can have a big impact on an options price.


Clearly there would be a difference depending on which side of the trade and market you are on. In very simple terms, volatility measures the difference from day to day in a stocks price. If a trader decides to buy a call option instead of stock, then the extra cash they have should theoretically earn interest for them. Well, the more the time until expiration, the greater the probability or chance of a profitable move.
While this doesn’t necessarily work so easily in the “real world” the theory behind it does make sense.



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Comments

  1. sadELovh22

    Should definitely go for Top Inventory & Options Trading Desk Day.

    30.07.2015

  2. HEYATQISA_DEYMEZQIZA

    Winnings that I had, I was testing home windows, fixed rate updates.

    30.07.2015