Quick Guide To Call & Put Options For The CFA Exam

One of the questions that we’ve been getting consistently is regarding options and how they react when different elements change. I think the easiest is to start with the easiest option:

Buyer Of A Call

The Buyer of a Call wants to see interest rates increase. Why? Because when rates increase, that means stocks are expected to increase more. The seller of a put also wants interest rates to increase since their chances of being “assigned” diminish.

The Buyer of a Call wants to see volatility increase. Why? Because volatility increases will help his chances of making a bigger profit. The buyer of a put also wants interest rates to increase since his chances of seeing the stock crash increases.

The Buyer of a Call wants to see time increase. Why? Because the more time they have, the more opportunity there is for the stock to increase. The buyer of a put also wants interest rates to increase since their chances of seeing the stock crash increases.

The Buyer of a Call wants to see the underlying price increase. Why? Because as it increases, the call becomes a better option to buy at a discount.  The seller of a put also wants interest rates to increase since their chances of being “assigned” diminish.

Do Not Try To Learn These By Heart

It is not about learning them. You must understand the relations to options.


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