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The value of an option consists of two components, namely, intrinsic value and time value.
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A call option is exercised if the exercise price is lower than the price of the store on the day of exercise,
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Minimum value of a call option is zero.
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Maximum value of a call option is the price of the underlying stock.
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A put option is exercised when the exercise price is more than the stock price of the underlying stock.
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Options can be efficiently priced using Binomial Option Pricing Model and Black-scholes pricing model.
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Sensitivity analysis of option premium deals with the measurement of changes in option price due to the change underlying parameters that determine the option prices.
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The delta of a stock option is the ratio of change in the price of an option to the change in the price of the underlying asset.
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Theta is a measure of option or derivative sensitivity with respect to expiration time.
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Vega measures the sensitivity of the option premium with respect to the volatility.
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Rho is a measure of the sensitivity of option value to change in interest rates.
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Gamma is the rate of the change of the option's delta with respect to the price of underlying stock.
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A measure of market speed is termed as volatility.
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