RSM332H1 Chapter Notes - Chapter 12: Call Option, Downside Risk, Put Option
Document Summary
If option is deep out of the money or deep in the money, time value is very small. Risk of option depends on range of possible outcomes. Imagine two at the money calls, one with variability and the other with variability. How far below strike price underlying asset falls is irrelevant. The variability asset has more value because more upside potential. Riskier assets more valuable because call protects from downside risk. More time means greater opportunity for asset price to exceed strike price. Holding all else equal, value of call option decreases as it nears maturity. If company pays a dividend, stock price drops. Increasing risk-free rate decreases present value of strike price. Decrease in s or increase in x increases value. Decrease in interest rate or increase in dividend increases value. Call option should always be held until maturity. Put option should be exercised immediately if underlying asset price goes to zero.
