7.12 Lessons learnt

  • As you can see there are many elements that influence the price of an option you now should understand the most important ones: Dividend, Interest, Underlying value, Volatility, Duration.
  • Standard deviation is a measure of dispersion around a mean value.
  • We use an underlying’s forward price and option information to calculate a mean value and standard deviation.
  • Using the standard deviation and mean value, we can create a probability distribution.
  • We calculate the area under a probability distribution in a given range to calculate probabilities.
  • When volatility increases, the standard deviation also increases ( all other elements being equal).
  • When days to expiration increase, the standard deviation also increases. ( all other things being equal).
  • When standard deviation increases, it is theoretically more likely for a strike price to expire in the money ( all other things being equal).