Question

What is the difference between a call and a put option? (Be clear in your answer.) What does the exercise—or strike—price denote? Of the five inputs discussed, what are three important inputs in the Black-Scholes option pricing model? For each of the three that you have chosen, what happens to the call option premium, all else being equal, when that variable increases?

Answer 1

1)call option - Holder has an option to buy

Put option - Holder has an option to sell

2) The strike price is the price agreed upon in the contract. this is the price in which the holder has an option to buy or sell the commodity

3)Volatility - Vega .measures the. sensitivity of the option. price to changes in the .volatility of returns on the underlying asset. Volatility is a very important .input because .option values can be .very sensitive to changes in volatility

Stock Price = Delta .describes the relationship .between Stock price .and the .option .price. Call option. deltas are positive .because as the .underlying asset price. increases, call option .value also .increases. In contrast,. the delta of a. put option. is negative. because the .put value falls .as the asset .price increases.

Strike price - directly. proportional .to Put option. price and. inversely call option. price effect can. be understood with. the similar. mindset as .during stock. price.

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