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What determines the price an investor will have to pay for an option?
Wiki User
∙ 16y ago
For listed options there is a quote with an ask price and you can buy the option for that price. If the question is how is that price determined that is much more complicated. Professional options traders use a mathematical formula, usually the Black-Scholes formula, to determine the value of an option. There are several inputs to the Black-Scholes which are days to expiration, strike price, volatility, and risk free interest rate. These professionals offer you the option at a certain ask price or will buy the option at a certain bid price. They make a living from the difference between the bid and the ask price and by using certain hedging techniques. So let's say you wanted to buy an option to buy 100 shares of xyz company for the next 6 months at a price of $100 and xyz is currently selling for $97. We know how many days to expiration, about 182, we know the strike price, $100, and we know the risk free interest rate, about 4%. What we don't know is the volatility. The historical volatility can be calculated and used to calculate the options value. However, for various reasons the option pros may feel the volatility the next 6 months will be different than the historical volatility and set the option price accordingly. This is called the implied volatility. Suppose the option price is $5 bid and $5.40 ask. You could bid $5.20 and maybe someone would sell you that option for $5.20. Remember options represent the right to buy 100 shares so you would pay $5.20 X 100 = $520 plus commissions of about $15 for a total of $535 for 1 option and the stock would have to be $105.35 or more in 6 months for this to successful. Dividends during the period also affect option prices but for simplicity I have assumed there are no dividends.
Wiki User
∙ 16y ago
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If the price of boots is 69.99 and saved 70 percent what do you have to pay?
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What is the sticker price on a new van is 27489 The dealer is willing to sell it for 90 percent of the sticker price how much would a buyer pay for the van at this price?
$24740.10
What does invoice price mean?
it is the final price or total amount that you ought to pay to a company or person.(usually find invoice on Ebay)
Cylinders are 25 percent off. Mrs Delmar buy 4 8 each and 6 9.50 each. What percent of the original price will Mrs Delmar pay?
It does not matter how many she buys nor what price each one is. If they are 25% off she will pay 75% of the original price however many she buys - as long as it is at least one. Else she will pay nothing.
A television is on sale for 15 percent off how much did you pay if the original price was 700?
595
How a company determines the price of its share?
If a company is publicly traded, the company itself does NOT decide the price of its shares, the market does. A share of stock trades for what an investor is willing to pay for it. Thus, if many investors are interested in buying a stock, its share price will rise. If there isn't much interest, its price will fall. Basic supply and demand.
What determines prices in capitalist systems?
The price someone is willing to pay - in other words, the market.
What happen if spot price remains above spot price in call option in stock?
If the spot price of the stock exceeds the "strike price" in the call option, the option is in-the-money and you can exercise it. But if you have a choice, wait to exercise it until the stock's spot price exceeds the strike price enough to cover the premium. Example: the strike price is $40 and the premium was $2. In order to make money on this option, the stock price needs to be over $42--enough to pay for the stock and replace the money you spent buying the option.
Does Delta airlines pay dividends?
Delta does not currently issue dividends to its shareholders, so an investor's return is only in the rising or falling of the share price over time.
Can the vale of call option be negative?
No. The value of a call option can never be negative. For example, let's say that one has a call option on FOO with a strike price of $30 and the option expires at the end of the day. If the underlying price of FOO shares are below $30, the price of the option will be very near $0 (because no one would pay much for the right to pay for an underwater option), but there is still a chance that the stock will go above $30 (no matter how remote). If the underlying price of FOO shares are at $30, the price of the option will be low, but positive (because there is a chance that the stock will go above $30. If the underlying price of FOO shares are above $30, the price of the option will be slightly higher than the difference between the strike price and the share price (because there is so little time left for changes; however, there will be some time value as suggested in the examples above).
Why would someone invest in a company that does not pay dividends?
An investor may choose to invest in a company without a dividend because the investor is looking to profit from the sale of this company's shares. They buy the stock at a low price and hope to sell it quickly at a higher price, and profiting from difference between these two prices (i.e. a capital gain).
When should you not exercise a call option?
You certainly should not exercise a call option when the stocks price is above the strike price. If you really want the stock, go and buy it at the market price. For example, if you own an option with a strike price of $15 and the stock is trading at $9, why would you pay $15 to buy a stock that you could only buy or sell for $9. That would be irrational.
How does the market determine the price and the quantities supplied and demanded?
The market determines the price and the quantities supplied and demanded because it is all about what a customer is prepared to pay. Too high a price may result in a fall in demand, and stock left unsold.
How does the market determine the price and quantity supplied and demanded?
The market determines the price and the quantities supplied and demanded because it is all about what a customer is prepared to pay. Too high a price may result in a fall in demand, and stock left unsold.
How does the market determine the price and the quantities supplied and demand?
The market determines the price and the quantities supplied and demanded because it is all about what a customer is prepared to pay. Too high a price may result in a fall in demand, and stock left unsold.
Who determines pay of the us president?
The USN
Considering All Options – The Put Option?
In my last post I introduced an investment tool known as the Call option. This time I’d like to discuss the Put option. Though similar in a few ways, the Put option represents a different end of the options game and allows investors to purchase a bit of downside protection on individual stocks they’re invested in. A Put option can be thought as an insurance policy on an investment on shares in which you hold a long position. As I pointed out last time, both types of options utilize a Strike price, which is the price of the underlying stock at which point the option becomes valuable. This point of earning value is a coming of age story for the options. Options that have reached their strike price are said to be “in the money”. The money an investor has to pay out in order to purchase an option is known as a premium. So to see how the Put option works, let’s resume the narrative of our investing buddy, Alice. Last episode, Alice used some Call options to help her buy shares of ABC Corp at a set price that ended up being below the market price. She even bought well enough below market to cover the cost of the Call option premium she paid. Now let’s look at how the Put option functions. A Put option allows an investor to sell shares to or “put” them back to an investor who sold you the put option. In our scenario, Alice holds shares of ABC Corp, having exercised her Call options and purchased 100 shares at $50 each. The markets are all abuzz over ABC Corp for a while, and the shares rise to $75 per share. But then Alice starts to get a bad feeling that maybe ABC is overvalued. She suspects the share price may be headed downward in the near future. Rather than sell her shares and be wrong however, she decides to purchase some Put options to cover herself in the event of a downturn. So she calls up Camille, and offers Camille, who is bullish on ABC, a $10 premium per share to purchase Put options on her 100 shares of ABC at a strike price of $60. Again, Alice is correct and the share price plummets to $50, bypassing the strike price by $10. Alice immediately exercises her options and sells the shares to Camille, who is obligated to purchase the shares at $10 more than the price on the open market. Alice is an investing ace – and quite savvy when it comes to using options.
