call option: relationship between time to maturity and option price?
all things constant i would expect option price to increase as time to maturity increases because there's more time value (time for the option to move into or deeper into the money) especially if the underlying stock is particularly volatile..
However, on 2nd of May, i took a look at Acorda Therapeutics, Inc. (ACOR) option prices with relevant maturities and there was actually a negative relationship? ie. as time to maturity of the option increased, the price seemed to decrease..
can anyone explain why this might happen?
thanks in advance
- Rolf GolfLv 59 years agoFavorite Answer
It was probably because of short term anticipation of its huge drop on 5 May. Extrinsic value of short term options are extremely good predictors of big short term stock movement. When such a big move is anticipated beforehand, implied volatility of short term options soar which results in a huge increase in short term extrinsic value which is sometimes enough to make short term options more expensive than longer term ones.
Options prices are mainly affected by moneyness, expiration and volatility. Time to maturity is only one of the determinants.Source(s): http://www.optiontradingpedia.com
- Anonymous9 years ago
All you need is this