The following components determine the value of an option:
# Variables Relating to Underlying Asset
## ''Value of Underlying Asset''
### as this value increases, the right to buy at a fixed price (calls) will become more valuable and the right to sell at a fixed price (puts) willbecome less valuable.
## ''Variance in that value''
### as the variance increases, both calls and puts will become more valuable because all options have limited downside and depend upon price volatility for upside.
## ''Expected dividends on the asset''
### Which are likely to reduce the price appreciation component of the asset, reducing the value of calls and increasing the value of puts.
# Variables Relating to Option
## Strike Price of Options; the right to buy (sell) at a fixed price becomes more (less) valuable at a lower price.
## Life of the Option; both calls and puts benefit from a longer life.
# Level of Interest Rates; as rates increase, the right to buy (sell) at a fixed price in the future becomes more (less) valuable.
bag
finance_public
created
Fri, 13 Jan 2012 18:02:50 GMT
creator
dirkjan
modified
Fri, 13 Jan 2012 18:02:50 GMT
modifier
dirkjan
tags
Real Options
creator
dirkjan