The derivatives of a call option's price with respect to the stock price, volatility, risk-free rate, exercise price and time to expiration indicate how the option price will change as the underlying inputs change. Option users must understand the significance of these derivatives. Some of the traditional interpretations of these concepts are misleading. At best, they provide only partial explanations for what is really happening. Decomposing a call into a margin transaction and an insurance policy provides clearer interpretations. For example, increased volatility has no impact on the value of the margin-position component of the call. It does, however, increase the insurance value of the option. A longer time to expiration (traditionally viewed as beneficial, giving the asset more time to appreciate) in fact increases the value of the margin position but can increase or decrease the insurance value.
Read the Complete Article in Financial Analysts Journal
Financial Analysts Journal
CFA Institute Member ContentPublisher Information
Association for Investment Management and Research
7 pages doi.org/10.2469/faj.v50.n4.43ISSN/ISBN: 0015-198X
We're using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy.
Privacy Settings
Functional cookies, which are necessary for basic site functionality like keeping you logged in, are always enabled.