3. Factors that affect the value of options Options are often referred to as contingent claims or wasting assets. In the first case, because their value is dependent upon the of the underlying stock, and in the second case, because their value is dependent on the length of time until the option expires. Option sare also affected by several other factors, and these factors will affect the value of call options and put options differently. However, und ading the effects of these different factors is the first step in understanding option pricing models. When all other things are held constant, an option on an extremely volatile share of stock is worth than an option on a less volatile share of stock. As the exercise price of a call option increases, the price of the call option will . However, as the length of the option period , the call option price will increase. The call option price will decrease when the price of the underlying stock Suppose Carmen bought an option that gives her the right to buy the stock of Company A at an exercise price of $45 per share. Company A 's stock is trading at $43 per share and has a 50% chance of increasing to $50 per share and a 50% chance of falling to $40 per share. Laurenz also bought a similar call option for Company B, whose stock was trading at $35 per share with the same exercise $ rice and expiration date. Company B's stock has a 50% chance of increasing to $65 per share and a 50% chance of falling to $25 per share. If all other things are the same, who is likely to pay more for the option? Laurenz Carmen This is true because the the volatility in the expected stock price of the underlying stock, the the value of the call option