What have we learnt?
- Calculating the future price of an option can be challenging as there are many variables to take into consideration.
- It is a lot easier to simulate the price based on a similar scenario in the future.
- Once you know how to do this, you will find it easy to use this method.
- For example, you hold a sold call option for December 2022 with a strike price of 100 on the share Heineken, and the option is 5,00 euros out of the money (the share is priced at 95,00).
- Suppose you want to know what will happen with the option’s price in case Heineken’s share price has not moved in December (still at 95,00). In that case, you can opt to simulate the same scenario using the first option expiry available and looking at that option that is also 5 euros out of the money. In this case, the first option expiry available is August 2022. You can see the call option with the strike price of 100,00 has a premium of 0,99.
If you want to determine what will happen with the price of this same call option (December 100,00) in case the option is 2,00 euros in the money but still has a remaining time to expiry of three months.
- In this case, the share price of Heineken has to be at 102,00;
- To simulate this scenario, you have to look at a call option that expires approximately three months from now and is 2,00 euros in the money.
- The option you are looking for must have a remaining expiry time of three months;
- And it must be 2,00 in the money.
- The share is priced at 95,66 – 2,00 is 93,66. This option is not available. Therefore, you look at the option which is closest to determine the price, which is 94,00. This option has a price of 5,35-5,55.
- So if in three months’ time Heineken is at 102,00 with still three months until expiry, you know your call option 100,00 will have a price of approximately 5,00-5,50.
- This method is not 100% accurate as the volatility in the market can be a determining factor, but it will give you an idea of where the market might head.