1. UNIT 3
OPTIONS

2. OPTION PRICING MODEL

3. Jul 60 Call vs Stock Price = 66
Option price curves P R E M I UM
Jul 60 Call vs Stock Price = 66
STOCK PRICE

4. Jul 60 Call vs Stock Price = 55
Option price curves P R E M I UM
Jul 60 Call vs Stock Price = 55
STOCK PRICE

5. XYZ 60 CALL PRICES vs STOCK PRICESM I UM
Strike Price = 60
Intrinsic Value = 0
STOCK PRICE

6. XYZ 60 Put prices vs Stock Prices
Strike Price = 60
Intrinsic Value = 0 P R E M I UM
STOCK PRICE

7. Option Pricing
Theoretical option pricing models are used throughout the option industry by professional option traders.
These models are rather complicated formulas that the six quantifiable factors and produce a theoretical value for an option

8. Option’s Theoretical Value

9. Theoretical Models

10. Value differs when factors differ
Stock Price = Rs. 62

11. Value differs when factors differ
Stock Price = Rs. 58

12. Value differs when factors differ
Stock Price = Rs. 60

13. Value differs when factors differ
Volatility = 35 %

14. Value differs when factors differ
Volatility = 50 %

15. Value differs when factors differ
Volatility = 20 %

16. Value differs when factors differ
Time (Days) = 66

17. Value differs when factors differ
Time (Days) = 90

18. Value differs when factors differ
Time (Days) = 29

19. Value differs when factors differ
Strike Price = Rs. 60

20. Value differs when factors differ
Strike Price = Rs. 50

21. Value differs when factors differ
Strike Price = Rs. 70

22. Value differs when factors differ
Dividend during the life of option = Rs 0.00

23. Value differs when factors differ
Dividend during the life of option = Rs 1.00

24. Value differs when factors differ
Dividend during the life of option = Rs 3.00

25. Value differs when factors differ
Risk free interest rate = 5 %

26. Value differs when factors differ
Risk free interest rate = 10 %

27. Black-Scholes model
One of the first theoretical option pricing models devised, and still widely used, is called the “Black-Scholes model”, named after the two academicians who created it
Although differing in approach, the same six quantifiable factors are the foundation for the most theoretical option pricing models

28. If you love formulas

30. Theoretical values can be used as a guide
It is the current market price of an option that is most important to the investor
Before purchase or sale of any option contract, the investor should first consider how its price fits within his tolerance for risk

31. Theoretical models are based on a set of assumptions about the future (i.e., interest rates, dividend payments, volatility, etc.), an investment based solely on theoretical values is at risk if these assumptions are no longer value

32. Non-quantifiable factors

33. Unpredictable future volatility

34. Liquidity matters

35. Stock Price

36. Stock Price

37. Stock Price

38. Which stock is more volatile?

39. Volatility of stock & option price

40. Jul 60 Option prices vs Volatility (%)M I U
Volatility = 35 %
Volatility %

41. Jul 60 Option prices vs Volatility (%)M I U
Volatility = 25 %
Volatility %

42. Jul 60 Option prices vs Volatility (%)M I U
Volatility %

43. Time until expiration

45. Option Prices vs Time (days left)U
No of days left = 100
Time (days left)

46. Option Prices vs Time (days left)u
No of days left = 50
Time (days left)

47. Option Prices vs Time (days left)u
No of days left = 150
Time (days left)

48. Strike Price

50. Jul option prices vs Strike pricesM I U
Strike Price = 60
Strike Prices

51. Jul option prices vs Strike pricesM I U
Strike Price = 65
Strike Prices

52. Jul option prices vs Strike pricesM I U
Strike Price = 55
Strike Prices

53. Dividends

55. Dividends P R E M I U
Dividend = Rs 1
Dividend per share

56. Dividends P R E M I U
Dividend = Rs 0.50
Dividend per share

57. Dividends P R E M I U
Dividend = Rs 1.50
Dividend per share

58. Interest rates

60. Jul 60 option prices vs int. ratesM I U
Interest = 5 %
Interest rates %

61. Jul 60 option prices vs int. ratesM I U
Interest = 7 %
Interest rates %

62. Jul 60 option prices vs int. ratesM I U
Interest = 7 %
Interest rates %

63. Greek