Table 142

Five Factors That Determine Option Values increases. For example, notice that increasing the exercise price reduces the value of a call option. Increasing any of the other four factors increases the value of the call. Notice also that the time to expiration and the variance of return act the same for puts and calls. The other three factors have opposite signs in the two cases.

We have not considered how to value a call option when the option can finish out of the money and the stock price can take on more than two values. A very famous result, the Black-Scholes option pricing model, is needed in this case. We cover this subject in a later chapter.

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