1. Current Stock Price –
Think, If you interested in a call
option that allows you to buy Reliance stock at 1150 per share, then you would
naturally pay more for the call when the stock is trading near 1150 as opposed
to it trading at 1200 right?
This is because the call option is now much closer to being ITM
at 1150 than it was if it was trading at 1200. This works in the opposite for
put options.
2. Strike Price – This is the price at which a
call owner may purchase stock, and the put owner may sell stock. Like the
example above, wouldn’t you pay more for the right to buy stock at say 1150
than for the right to buy stock at 1200?
Of course you would always prefer the right to buy stock at a
lower price any day of the week! Thus, calls become more expensive as the
strike price moves lower. Likewise, puts become more expensive in value as the
strike price increases.
3. Type of Option – The value of an option depends
on which type it is: Call or Put. Clearly there would be a difference depending
on which side of the trade and market you are on. This probably is the easiest
variable to understand.
4. Days Until Expiration – Options have a definitive life
because of expiration. Therefore, an option will increase in value with more
time. Why? Well, the more the time until expiration, the greater the
probability or chance of a profitable move. For Nifty and Bank nifty have
weekly Expiry while Stock have Monthly Expiry.
5. Interest Rates – This is really a small factor
in determining an option’s price. When interest rates are on the rise, the
value of call options rise as well. If a trader decides to buy a call option
instead of stock, then the extra cash they have should theoretically earn
interest for them. While this doesn’t necessarily work so easily in the “real
world” the theory behind it does make sense.
6. 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. As dividend increases, puts are worth more
while calls are worth less.
7. Volatility – The big variable right? In very
simple terms, volatility measures the difference from day to day in a stock's
price. I think of it as the “swings” that a stock has. Does it move back and
forth violently or trading in a defined range with little daily movement? The
stock like IBULL or DHFL have big volatility Compare to NTPC or GAIL.
Stocks that are volatile go through more frequent strike price
levels than the non-volatile stocks. With these big moves, you have a higher
chance of making money (i.e. moves outside the Blue area).
Thus an option on a volatile stock is much more expensive than
one on a less volatile stock. Remember that even a small change in the
volatility estimate can have a big impact on an options price.
0 Comments