Value of a European call option (directly related to).

Hi,
thanks you for your comment. Even it the price increase was slow and steady, why would the value of my call decrease? Plus the curriculum states that “The value of a European call option is directly related to the value of the underlying… this make the whole thing a bit.. difficult to understand
 
Swissfox wrote:
Hi,
thanks you for your comment. Even it the price increase was slow and steady, why would the value of my call decrease? Plus the curriculum states that “The value of a European call option is directly related to the value of the underlying… this make the whole thing a bit.. difficult to understand
Click to expand...
A simplified example: Lets say an underlying stock has a daily movement of 0,5%.
The stock currently trades @ 100
You buy a a european call with a strike price @ 120 maturing in 6 Month.
On day 1 the stock drops 10%. On day 2 the stock rises 10%.
The stock price is now 99 (100*0,9*1,1=99), which is 1 % lower than when you bought your call. So if there were a direct relation with the price of the underlying your call option would be cheaper today than it was on the day you bought it when the stock traded at 100.
But in reality your call price is now higher! Why? because with 10% swings the chances are higher that your call will be in the money in 6 months.
See my point?
 
thank you very much for your example. Much appreciated.
However, I still find the question very tricky, moreover when it’s clearly written in the book.
But I got your point, thank you
 
I completely agree that some questions are written in a tricky and often confusing way.
Because of these questions, sometimes when I get a staight forward question, I re-read it 3-4 times to make sure I didn’t miss any trick :-)
 
It’s correct that underlying price and volatility of underlying are both directly related. But consider this. If there is no volatility of the underlying price, then it means that price of the underlying is constant. Which means there won’t be any relation between the value of the option and the price of the underlying as the value of the option will always equal to intrinsic value. So theoretically c) is a better answer. Shitty question though.
 
Thanks Gigaloo! Yeah, indeed, let’s hope that it will be clearer at the exam! Thank y’all for your big help! Much appreciated
 
Actually is we take an underlying which is far from the strike even when it goes up not much will happen. However if volatility is high this definitely will impact the price
 
Actually is we take an underlying which is far from the strike even when it goes up not much will happen. However if volatility is high this definitely will impact the price
 
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