Running Head: CALL OPTION e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e 1
8-2 Short Paper: Call Option Price
SNHU
The stock price is the current price of each share that is issued by a publicly-traded business
entity. The call price is the specific price at which a callable share’s issuer has the right to buy it back from
CALL OPTION e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e
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the creditor or investor. The change in the stock price has a direct impact on the call option price. When
the stock price increases, there is an increase in the value of the call option. When the stock prices go up,
higher is the price of the call option. On the other hand, when there is a decline in the stock price of a
business, its call option price also diminishes. In the case of call options, the fluctuation in the price
relating to the underlying stock acts as one of the main factors that influence the rise or decline in the price
of call options. Hence the price of the call option increases, and it becomes more valuable when there is an
increase in the stock price (Chapter 21 . Options - University of Houston, 2021).
Effect of Time expiration a call option price
Time expiation is the key component that has an impact on the time value of element of the
premium of an option. When the expiration period approaches, the level of the time value of a call option
reduces or gets eroded. In case there exists more time until the expiration, the time value of the call option
is higher. It implies that if there is a higher time until the expiration, the call option price is high. As the
expiration gets nearer, the price of the call option starts to decline and diminish. The time component is an
instrumental factor that must be taken into consideration while buying and selling options. When ample
time is available, and the expiration date is far, the call option’s value and the price are high. When the
time totally expires, the price of a call option turns to zero. On the contrary, when the time to expiration
increases, the call options become more valuable, and their prices rise (Chapter 21 . Options - University
of Houston, 2021). e e
Effect of Risk-free rate on a call option price
The risk-free rate refers to the interest that an investor expects to receive from an entirely risk-free
investment over a specific period of time. It plays a vital role in influencing the price of a call option.
When the risk-free rate rises, the value or price of a call option also rises. There exists a direct association
between the risk-free rate and the call option price of a stock. The risk-free rate can be considered to be the
rate of return that an investor gets on the stock. It is a vital component that can have an influence on the
CALL OPTION e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e
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pricing models relating to options. Call options have a positive RHO, which implies that they are
positively linked to the alteration in the interest rates. An increase in the interest rate has the potential to
increase the call premiums. On the other hand, an increase in the interest rate has the potential to decrease
the put premiums. In the specific context relating to call option price, an increase in the risk-free rate
increases the price and value of a call option, whereas a decline in the risk-free rate decreases the price and
value of a call option (Bloch, 2019).
Effect of Standard Deviation of Stock returns on a call option price
‘Standard deviation of stock returns’ helps to ascertain the risk that is related to stocks. When the
standard deviation of stock returns increases, the alteration in the value of the stock also increases. It
ultimately increases the possibility of the stock of ‘being in the money’ also increases. In other words, it
leads to an increase in the price as well as the value of the call option. There exists a direct association
between the standard deviation of stock returns and the call option price. Hence when there is a decline in
the standard deviation of stock returns, there is a reduction in the value of the stock, which leads to a
decline in its call option price as well. The standard deviation of stock returns acts as a vital measure that
sheds light on the volatility that exists in the market setting. It serves as a vital measure of risk, which
helps to determine the call and put options values. When the return relating to the standard deviation of a
stock is higher, the stock value, as we as the call option value and price, are positively impacted. e
References
Bloch, D. A. (2019). Option pricing: Theory and applications. Available at SSRN 3467551.
