A stock can only go down to zero¨ whereas it can theoretically go up to infinity. For example¨ it’s conceivable a Rs 20 stock can go up Rs30, but it can’t go down Rs 30. Downward movement has to stop when the stock reaches zero. Normal distribution does not account for this discrepancy, it assumes that the stock can move equally in either direction
Volatility is a measure of the speed at which a stock’s price changes over time. High-volatility stocks are more likely to make large percentage moves up or down, and therefore options on such stocks have a higher likelihood of expiring in the money, perhaps deep in the money. Therefore, options on stocks with high volatility will tend to have higher relative option premiums than stocks with lower volatility.
The Option Trader Handbook: Strategies and Trade Adjustments
To understand how options work, one needs first to understand what an option is. An option is a contract that gives its owner the right to buy or the right to sell a fixed quantity of an underlying security at a specific price within a certain time constraint. There are two types of options: calls and puts. A call gives the owner of the option the right to buy the underlying security. A put gives the owner of the option the right to sell the underlying security. As in any transaction, there are two parties to an option contract—a buyer and a seller.
TRADING OPTION GREEKS -How Time, Volatility, and Other Pricing Factors Drive Profits
