1.Currentvalueofunderlyingasset.Optionsareassetsthat
derivevaluefromanunderlyingasset.Consequently,changes
in thevalue oftheunderlyingassetaffect thevalueofthe
optionsonthatasset.Sincecallsprovidetherighttobuythe
underlyingassetatafixedprice,anincreaseinthevalueof
theassetwillincreasethevalueofthecalls.Puts,bycontrast,
become less valuable as the value of the asset increases.
- Variance in valueof underlyingasset. The buyer ofan
option acquires the right to buy (call) or sell (put) the
underlyingassetatafixedprice.Thehigherthevariancein
thevalueoftheunderlyingasset,thegreaterwillbethevalue
of the option.
18 Thisistrueforboth callsandputs.Whileitmayseem
counterintuitivethatanincreaseinariskmeasure(variance)
should increase value, options are different from other
securitiessincebuyersofoptionscanneverlosemorethan
thepricetheypayforthem;infact,theyhavethepotentialto
earn significant returns from large price movements. - Dividends paid on underlying asset. The value of the
underlying asset can be expected to decrease if dividend
paymentsaremadeontheassetduringthelifeoftheoption.
Consequently,thevalueofacallontheassetisadecreasing
functionofthesizeofexpecteddividendpayments,andthe
valueofaputisanincreasingfunctionofexpecteddividend
payments.There isa moreintuitivewayof thinkingabout
dividendpaymentsforcall options.Itisa costofdelaying
exerciseon in-the-moneyoptions. Tosee why,consideran
optiononatradedstock.Onceacalloptionisin-the-money
(i.e.,theholderoftheoptionwillmake agross payoff by
exercisingtheoption),exercisingthecalloptionwillprovide
the holder with the stock and entitle him or her to the