Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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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.



  1. 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.

  2. 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

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