There are six factors affecting the price of a stock option:
The current stock price,
The strike price, K
See AlsoICE Education: Course DetailThe time to expiration, T
The volatility of the stock price, σ
The risk-free interest rate, r
The dividends that are expected to be paid.
In this section, we consider what happens to option prices when there is a change to one of these factors, with all the other factors remaining fixed. The results are summarized in Table 11.1.
Variable | European call | European put | American call | American put |
---|---|---|---|---|
Current stock price | + | − | + | − |
Strike price | − | + | − | + |
Time to expiration | ? | ? | + | + |
Volatility | + | + | + | + |
Risk-free rate | + | − | + | − |
Amount of future dividends | − | + | − | + |
+ indicates that an increase in the ... |