I’m wanting to buy a call option. I have the prices of 13 calls and the strike prices & the volatility of the stock. The stocks current price is $96.60 but I believe it’s going to rise to $105 by December when the call expires. How would I go about analysing and deciding which option is the best to buy? Do I just look at the potential pay off of each one & how do I factor the volatility into that. Strike prices are between $92 & $106 but each have a different call price.
I’m wanting to buy a call option. I have the prices of 13 calls and the strike prices & the volatility of the stock. The stocks current price is $96.60 but I believe it’s going to rise to $105 by December when the call expires. How would I go about analysing and deciding which option is the best to buy? Do I just look at the potential pay off of each one & how do I factor the volatility into that. Strike prices are between $92 & $106 but each have a different call price.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I’m wanting to buy a call option. I have the prices of 13 calls and the strike prices & the volatility of the stock. The stocks current price is $96.60 but I believe it’s going to rise to $105 by December when the call expires. How would I go about analysing and deciding which option is the best to buy? Do I just look at the potential pay off of each one & how do I factor the volatility into that.
Strike prices are between $92 & $106 but each have a different call price.
Expert Solution
Step 1
Call options and the factors that affect them:
Call options give their holders the right but, not the obligation to purchase the underlying stock at a pre-determined strike price on or before the expiry date.
A call option whose strike price is lower than the spot rate is said to be in the money.
When the call's strike price and the spot price are equal, it is said to be at the money, while a call with a higher strike price vis-a-vis the spot price is said to be out-of-the-money.
Option premiums are impacted by the following factors:
- The movement in the prices of the underlying assets
- The rate at which option premiums change when the price of the underlying changes by $1.
- The time decay that impacts the value of an option
- The change in the option value for a change in implied volatility.
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