How are option premiums (market option values) for puts and calls related to Stocks?

Puts = Stock price increase will cause the value to decline Call = Stock price increase will increase the value of the option

How are option premiums (market option values) for puts and calls related to Exercise Price?

The call option should decrease in value with the exercise price because the payoff to a call, if exercised, equals S - X. The put option should increase its value with increased exercise price since you want the stock price to be below exercise price

How are option premiums (market option values) for puts and calls related to Dividends?

Call = high dividend will lower the value Put = high dividend will increase the value

How are option premiums (market option values) for puts and calls related to Volatility?

Call = high volatility will increase the value Put = high volatility will increase the value

How are option premiums (market option values) for puts and calls related to Interest rate?

Call option values are higher when interest rates rise (holding the stock price constant) because higher interest rates also reduces the present value of the exercise price. Put option values are lower when interest rates rise because higher interest rates reduces the present value of the exercise price. You want X to be higher for put

How are option premiums (market option values) for puts and calls related to Time until expiration?

Call = longer means higher valuation Put = longer means higher valuation

What is the intrinsic value of call option?

Stock Price - Exercise Price

What is the intrinsic value of put option?

Exercise Prie - Stock Price

What is the time value of options for Call options?

Call premium - Call intrinsic value

What is the time value of options for Put options?

Put premium - put intrinsic value

What is the time value of options?

Longer time means higher volatility means higher value.

How are put and call option premiums related under put-call parity?

In a competitive market, investments with equivalent payoffs should have equivalent values. Payoff to a stock + a put will have the same payoff as to a call + risk free bond because options have the same exercise price and expiration and the face value of risk free bond equals. These option and stock positions must all have the same return or an arbitrage opportunity would be available to traders. Any option pricing model that produces put and call prices that don't satisfy put-call parity should be rejected as unsound because arbitrage opportunities exist.

Why are American style call options worth more "alive" than "dead"?

Because of time value and volatility

Why is exercise of American style put options prior to expiration sometimes optimal?

Suppose that you purchase a put option on a stock. Soon the firm goes bankrupt, and the stock price falls to zero. Of course you want to exercise now, because the stock price can fall no lower. Immediate exercise gives you immediate receipt of the exercise price, which can be invested to start generating income. Delay in exercise means a time value of money cost. The right to exercise a put option before expiring must have value. Now suppose instead that the firm is only nearly bankrupt with the stock selling at just a few cents. Immediate exercise may be optimal. After all, the stock price can fall by only a very small amount, meaning that the proceeds from future exercise cannot be more than a few cents greater than the proceeds from immediate exercise.

Why are American style options worth at least as much as European style options?

They both have same features except that American options have time flexibility. n