BUS-F 446 Lecture Notes - Lecture 11: Option Style, Moneyness, Call Option
Document Summary
Moneyness : in the money: exercising an american option immediately when stock price > strike price, stock price < strike price = out of the money, this terminology would be reversed for puts. Total value = time value + intrinsic value. Strike price, asset price, interest rate, volatility, days until expiration. It"s driven by the likelihood of whether it will be above the strike price. Volatility flattening and stretching option price increases. As risk rises, the value of the option increases. Any point below the strike price is 0. Increased time to expiration increased likelihood of being above strike price. If interest rates rise, pv of strike price goes down, options are more valuable! The black-scholes option-pricing model is accurate within pennies in terms of predicting the future value of options. What they tell you to do: for american call on a non-dividend paying stock, never exercise it early, exercising losing time value.
