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November 19, 2017 
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Option Master Chapter 7
Download the Option Master Manual - PDF 187k

 

Software for Pricing Options
by Kenneth R. Trester
and Robert P. Swanson


Chapter 7 - Other Factors that Influence an Option's Price


Besides the four components of option prices that we mentioned in Chapter I (the stock price, the strike price, the number of days until expiration and, most importantly, the price volatility of the underlying stock), there are other factors that will influence an option's price.

The most important factor here that will affect a stock option's price is the dividends paid by the stock. Dividends will influence the option price because they will have a downward bias on the stock price when they are paid (ex-dividend day). We have not included this component in OPTION MASTER® because some investors do not have this information readily available, and it takes more time and effort to input this component into OPTION MASTER®, slowing down the pricing process.

Remember, the mission of OPTION MASTER® is to make it extremely easy and quick to use, and to be able to price many options in a short period of time. But dividends are a factor, and will sometimes influence options prices -- usually to a small degree. With OPTION MASTER®, it is quite easy to adjust the pricing model to dividends. To adjust a stock for dividends, identify what the quarterly dividend payment will be, and if it is coming up in the near future (within a month or so). Then you can subtract that dividend from the stock price and enter that adjusted stock price in OPTION MASTER®.

Dividends will not have too much influence on an option price unless a large dividend is upcoming, and then, of course, a slight adjustment in the stock's price will make a correction to OPTION MASTER®. Small dividends will have little effect on the option price, and dividends that are two or three months off in the future may have a small effect on the option price.

Another factor that influences an option's price is the prevailing interest rate. Interest rates will influence the market price of an option. When you have high interest rates, of course, the cost of holding a stock position is more expensive and an option is a means of holding a stock position without owning the stock. Therefore, that option in the market will increase in price, as interest rates increase.

Only price volatility and the factors we previously mentioned will have an influence in determining whether a stock, index or futures would be at a certain price in the future. There is some controversy over option pricers, but we believe OPTION MASTER® will provide you with a good gauge of what an option's fair value or true worth should be.


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