Call / put options question. decrease, interest, increase, question, buyer

whew1110

Hey guys, I have a very specific question.

Call options increase as interest rates rise, this is for the buyer of the call right? (Right to call, and invest in higher rate)

Call options decrease as interest rates rises, this is for the seller right? (The need to sell and reinvest in lower rates is opposite of rising rates)

Why is put options decreases as interest rates decline wrong? I would think the put option decreases as int rates decline because the need to sell for cash decreases as the reinvestment rate is also decreasing?.

if that makes sense....

burnsy562000

If you are talking about Options (Derivative) - Call/Put...

See if this helps

Put-Call Parity

P+S = C + X/(1+r)^t

Therefore,
P = C + X/(1+r)^t - S
and
C = P + S - X/(1+r)^t

If interest rates rise, the X/(1+r)^t component decreases...
i.e. 10/1.10 = 9.09 vs
10/1.20 = 8.33

For Puts, if interest rates increase, your X/(1+r)^t is lower, and therefore you are adding less to the Put value. If rates decrease, your X/(1+r)^t value is higher, and therefore adding more to your Put value.

For Calls, if rates increase, your X/(1+r)^t component decreases, which turns out to be a lower negative for the Call function, and therefore, a higher Call value. If rates decrease, your X/(1+r)^t is higher, therefore reducing the Call value...]

I hope i didn't confuse you.... or my self.

Jolyn

For options on stocks use the put call parity equation and apply some algebra skills.

For options on bonds determine how the intrinsic value changes and the price of the underlying is affected directly by interest rates.

Mechanic

Rise in interest rate ->Rise in cost of Carry -> Rise in future price -> Rise in call, decrease in put

lc26mizzou

bluejazzy Wrote:
-------------------------------------------------------
> Hey guys, I have a very specific question.
>
> Call options increase as interest rates rise, this
> is for the buyer of the call right? (Right to
> call, and invest in higher rate)
>
> Call options decrease as interest rates rises,
> this is for the seller right? (The need to sell
> and reinvest in lower rates is opposite of rising
> rates)
>
> Why is put options decreases as interest rates
> decline wrong? I would think the put option
> decreases as int rates decline because the need to
> sell for cash decreases as the reinvestment rate
> is also decreasing?.
>
> if that makes sense....


I am not sure I get your question but what I make out of it is this:
When IR rises, it is better to buy a call option rather than the underlying stock since for option you need to pay less upfront. You would rather put that money in a bank and earn high interest on it. So the premium required upfront to buy a call option increases or we can say, the price of the option increases. So buyer has to pay more and seller gets more.
In the case of put option, if you are long on it, you are putting off selling the stock and getting money from it. So you are losing out on the high interest you could have got if you had sold the stock now. So the price of the put option reduces in the market i.e. you have to pay lesser premium to buy a put option. It is kind of like supply and demand. Since demand of call option increases, its price increases. Since demand of put option decreases, its price decreases.

Same way work out the logic for when IR decreases.