💹 Capital Market Chronicles – Episode 203: OPTIONS VALUATION (Part III)
Welcome to the grand finale of our options valuation saga! Let’s look at the final ingredients that complete the pricing recipe — interest rates, dividends, and the wizardry of mathematical models.
5️⃣ Risk-Free Interest Rate – The Silent Influencer 🏦
This refers to returns from super-safe investments like government bonds.
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Calls: When interest rates go up, call premiums rise — because buying the stock in the future feels cheaper in today’s terms.
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Puts: Higher rates make puts slightly less attractive, reducing their premium.
Summary:
💰 Call Options: Higher rate = Higher premium
📉 Put Options: Higher rate = Lower premium
6️⃣ Dividend Yield – The Sneaky Adjuster 💸
Dividends can quietly affect option prices.
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Calls: When dividends are paid, stock prices drop a bit — so call premiums usually fall.
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Puts: On the flip side, puts may become more valuable as the stock price dips.
Summary:
💡 Call Options: Higher dividend = Lower premium
💡 Put Options: Higher dividend = Higher premium
7️⃣ The Black-Scholes Model – The Pricing Maestro 🎩
All these elements — stock price, strike, time, volatility, interest rate, and dividends — come together in the famed Black-Scholes model, which gives traders a way to estimate an option’s fair value before expiry.
It’s like a GPS for pricing — not perfect, but definitely better than guessing! 😄
🧭 Summary of the Trilogy
Understanding what shapes an option’s price helps traders make smarter decisions — and sleep better at night! 😴
Each factor — from stock price to time, volatility to interest rates — pulls or pushes the premium in its own way.
By mastering these dynamics, investors can move from guessing to calculating — and that’s where trading turns from speculation to strategy.
💬 Stay tuned: In the next leg of our Chronicles, we’ll explore how these pricing principles power real-world trading models and decision-making!
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