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

TABLEA12.1SummaryofVariablesAffectingCallandPut
Prices

Effect On

Factor

Call

Value

Put Value

Increase in underlying asset’s value Increases Decreases

Increase in strike price DecreasesIncreases

Increase in variance of underlying

asset

Increases Increases

Increase in time to expiration Increases Increases

Increase in interest rates Increases Decreases

Increase in dividends paid DecreasesIncreases

American versus European Options: Variables Relating to
Early Exercise

A primary distinction between American and European
optionsisthatAmericanoptionscanbeexercisedatanytime
priortoexpiration,whileEuropeanoptionscanbeexercised
only atexpiration. Thepossibility ofearly exercise makes
American options more valuable than otherwise similar
Europeanoptions;italsomakesthemmoredifficulttovalue.
Thereisonecompensatingfactorthatenablestheformerto
bevaluedusingmodelsdesignedforthelatter.Inmostcases,
thetime premium associatedwith theremaininglife ofan
option and transactions costs makes early exercise
suboptimal. In other words, the holders of in-the-money
optionswillgenerallygetmuchmorebysellingtheoptionsto
someone else than by exercising the options.