Question

Explain how options prices are derived? What are ALL the factors that affect options prices? Include an example of options contracts of a company and compare them with options of one competitor.

Answer 1

Before Launching the world of option trading, the peoples and the investors have a good knowlegde of factors that determine the value of optionand these are includes -

1.Interest rates

2.Cash dividend paid

3.Time value

4.Current market price

5.Intrinsic value

and there are many factors that determine the value and fair market prices of options.

The movement in price of stock market is directly affect the option but not equal effect in prices. If the prices of stock is rises then the call option price are rise and put option price are fall. If any changes are made in stock prices then the effect of the same as reversal effect are on the call and put option prices.

The factors that affect the option prices are -

1.Underlying Prices = The most influence factor is current market price of underlying assets. If the Price of underlying increase then the call price increase and put price decrease. If the Price of underlying Decrease then the call price decrease and put price increase and vice versa.

2. Strike Price = Premium increase then the option are further in the money.Premium decrease then the option are further out of the money. The strike price can be determined if the stock of the market have intrinsic value.

3. Time until expiration = The longer the time until expiration have higher the option price and The shorter the time until expiration have lower the option price.

4. Interest rates = If interest rate is rise then the call price is increase and the put price is decrease but If interest rate is fall then the call price is decrease and the put price is increase.

5. Dividend = If dividend rise, then the call price is decrease and the put price is increase but if dividend fall, then the call price is increase and the put price is decrease.

There are two reasons the investors use the option is to speculate and to hedge. Hedge is the best position in the world for do minimum loss. Many of the investors use the position for earning profit but this is actually means that it is for doing his minimum loss.

The Option Contracts is Punjab National Banks and the competitor of the same is State Bank of India. These are two competitors which the peoples do the contracts of option.