The Relationship Between Price Changes of Call and Put Options of a Stock

Understanding the dynamics between call and put options in relation to stock prices is a critical aspect of options trading. This article delves into the factors influencing option prices and explores the correlation between changes in call and put options of a stock.

Factors Influencing Option Prices

The primary factors determining the price of call and put options are:

Stock Price: Directly impacts the intrinsic value of both call and put options. Time to Expiry: The length of time until the option expires also plays a significant role. Volatility: Higher stock price volatility increases the value of both options, as it gives traders more confidence that the stock price will move significantly.

Both call and put options are influenced by these factors, often moving in inverse directions. For instance, as the stock price moves up, the demand for call options increases, while the demand for put options decreases, and vice versa.

A Real Example: BHEL on August 2015

To illustrate this relationship, let's consider a real-life example from August 2015 involving BHEL (Bharat Heavy Electricals Limited). BHEL's stock price declined significantly over a short period:

Stock Price: From Rs. 282.45 on August 06, 2015, to Rs. 229.55 on August 24, 2015, representing a nearly 20% decline.

Change in Call and Put Option Prices

Below are the changes in the call and put option prices for the strike price of Rs. 280:

Call Option: Price changed from Rs. 11.30 on August 06 to Rs. 0.20 on August 24. Pot Option: Price changed from Rs. 9.50 on August 06 to Rs. 48.40 on August 24.

These price changes highlight the inverse relationship between call and put options as the stock price drops. This is due to the increased demand for put options and the decreased demand for call options, reflecting the elevated risk and uncertainty in the market.

Greeks and Market Dynamics

Options are priced based on several Greeks, which are measures of sensitivity to different factors. The key Greeks are:

Delta: The rate of change of the option price with respect to the underlying stock price. Theta: The rate of change of the option price with respect to time to expiry.

The relationship between call and put options is further influenced by market dynamics and the interaction of these Greeks. For instance, during times of high volatility or close to expiry, the relationship can be more pronounced, but it is not linear and can be complex.

Developing a Market Model

While it’s challenging to develop a specific ratio that comprehensively explains the behavior of the entire market, some models based on multiple subjects can provide insights. However, these models represent the crowd more than the specific issue at hand.

Conclusion

In conclusion, the relationship between the price changes of call and put options of a stock is influenced by several factors. While an exact linear relationship may not hold true due to market dynamics, there is a certain degree of correlation between the price changes of call and put options as they both react to the underlying asset's price movements.

The understanding of this relationship is crucial for traders to make informed decisions. By considering the factors such as stock price, time to expiry, and volatility, as well as the Greeks, traders can better gauge the behavior of call and put options.