Economics Options And Futures Questions Long
The main factors affecting options and futures market prices can be categorized into two broad categories: intrinsic factors and extrinsic factors.
1. Intrinsic Factors:
a) Underlying Asset Price: The price of the underlying asset is a crucial determinant of options and futures prices. For call options, as the underlying asset price increases, the value of the option also increases. Conversely, for put options, as the underlying asset price decreases, the value of the option increases.
b) Strike Price: The strike price is the predetermined price at which the underlying asset can be bought or sold. The relationship between the strike price and the current price of the underlying asset affects the value of the option. In general, options with strike prices closer to the current price of the underlying asset tend to have higher values.
c) Time to Expiration: The time remaining until the option or futures contract expires is a critical factor. As the expiration date approaches, the time value of the option decreases, leading to a decline in its price.
d) Volatility: Volatility refers to the degree of price fluctuations in the underlying asset. Higher volatility generally leads to higher option prices as there is a greater probability of the option being in-the-money. Conversely, lower volatility tends to decrease option prices.
2. Extrinsic Factors:
a) Interest Rates: Changes in interest rates can impact options and futures prices. Higher interest rates tend to increase the cost of carrying the underlying asset, which can reduce the value of futures contracts. For options, higher interest rates can increase the cost of holding the option, leading to a decrease in its value.
b) Dividends: For stocks, the payment of dividends can affect options prices. When a stock pays a dividend, the stock price typically decreases by the dividend amount, which can impact the value of call options. Conversely, put options may increase in value as the stock price decreases.
c) Market Sentiment: Market sentiment, including investor expectations and emotions, can influence options and futures prices. Positive sentiment can lead to higher prices, while negative sentiment can result in lower prices.
d) Supply and Demand: The overall supply and demand dynamics in the options and futures market can impact prices. If there is a high demand for a particular option or futures contract, its price may increase. Conversely, if there is an oversupply, prices may decrease.
It is important to note that these factors interact with each other and can vary depending on the specific market and instrument being traded. Traders and investors analyze these factors to make informed decisions and assess the potential risks and rewards associated with options and futures trading.