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Stock Market Volatility Tutorial |
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* Volatility - in general, the greater the volatility of the
underlying asset, the greater the time value will be.
This is due to the fact that the writer is exposed to a greater
probability of incurring a loss, and will require higher premium
income to compensate for the increased risk.
Interest rates - an increase in interest rates will lead to
higher call option premiums and lower put option premiums, all
else being equal.
This reflects the cost of funding the underlying shares. The
taker of a call option can defer paying for the shares until the
option's expiry date, and invest the funds elsewhere during this
period. As interest rates rise, more interest can be earned on
the funds, so the call option is worth more to the option taker.
The effect of an interest rate rise is the opposite for put
options, as the taker is deferring the receipt, rather than the
expenditure of funds.
When |
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using interest rates in an option pricing model, the risk
free rate which matches the life of the option is usually used.
So, for example, for a three month option the three month bank
bill rate would be used.
Dividends - if a dividend is payable during the life of an
option, the premium of a call option will be lower, and the
premium of a put option higher, than if no dividend was payable.
This is because shares tend to fall in value on going
ex-dividend, all else being equal. Anything that leads to lower
share prices will make call options less valuable, and put
options more valuable.
Market expectations - ultimately, the pressures of supply and
demand determine the value of options.
Theoretical fair value Pricing formulae are available to help
you determine the theoretical 'fair value' of an option. The Cox
Ross Rubinstein binomial model is widely accepted as the
industry standard for equity |
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options.
However, you should realise that pricing models calculate fair
value based only on estimates of volatility, interest rates and
other factors. The price at which an option trades may not
necessarily be the same as its fair value.
The Latin phrase known to most Stock Market Traders is "Carpe
Diem." It means seize the day. Today is the first day of the
rest of *YOUR* life! =======================================
http://www.australiansharetrading.com/ the complete online
resouse for share trading Please use this aricle, you have my
prior consent to do so, just don't change a thing.australian share
trading By Nik Halik =>
http://www.australiansharetrading.com offers share trading news
===========================================
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