Math wizz please, Option probability and interest rates

Discussion in 'Options' started by Digs, Jun 19, 2012.

  1. Digs


    This is how I calculate an option probability cone on a price chart

    TradePrice = 130
    Implied vol = 18.25%
    DaysToGo (Option Days to Expiration)=35
    Sigma(or 1x StdDev) = 1
    Total Days = 365

    FORMULA - [No interest rates]
    ConeVal = Sigma * Price * (Implied vol / 100) * Math.Sqrt(DaysToGo / TotalDays)

    UpperLineConeValue = TradePrice + ConeVal
    LowerLineConeValue = TradePrice - ConeVal

    Question: If I have interest rate of 2.25% and dividend of 1%, where do I stick these into the formula? Any ideas?? Please be specific ...

    Interest rates do this to premiums .."
    An increase in interest rates will drive up call premiums and cause put premiums to decrease. To understand why, you need to think about the effect of interest rates when comparing an option position to simply owning the stock. Since it is much cheaper to buy a call option than 100 shares of the stock, the call buyer is willing to pay more for the option when rates are relatively high, since he or she can invest the difference in the capital required between the two positions"...

    Read more:"
  2. sle


    You need to simply multiply the Price by exp(interest rate - div rate).
  3. Digs


    Thanks for a response

    If I have price of $100

    Divid Yld 1%
    Interest Rate 3%

    Price is $100 * (1-.01+.03)

    or Price is $100 * 1.02% = $102

    Is this correct ?
  4. sle


    If your option expires in a year, the spot price is 100, your interest rate is 1% and your div yield is 3% then your stock forward is 100 * exp((1% - 3%) * 1 year) = about 98%.
  5. Digs


    Thanks...I thougth dividends lowered price and interest rates increase price, you have them the other away around.

    When a stock goes ex Div, price is adjusted down is it not?