The change in price of option or derivative and direction of market is based on two basic theories of
ecomonics and mathematics
(A) Demand and
Supply
(B) Probability
What effect on price of an option contract when its demand rises and supply decreases?
When the demand for an option contract rises and the supply decreases, the price of the
option contract typically increases. This occurs due to the economic principle of supply and
demand: with higher demand and lower supply, the option contract becomes more scarce.
Consequently, buyers are willing to pay more to acquire it, leading to a price increase.
This price adjustment ensures that the market reaches a new equilibrium where the quantity
demanded equals the quantity supplied at a higher price level.
What effect on price of a option contract when demand of its rise and supply rise?
When the demand for an option contract rises and the supply also rises, the effect on
the price can vary depending on the relative magnitudes of the changes in demand and supply:
1. Demand Rises More Than Supply: If the increase in demand is greater than the increase in supply, the price of the option contract will likely increase. This is because the higher demand still outweighs the increased supply, leading to upward pressure on the price.
2.Supply Rises More Than Demand: If the increase in supply is greater than the increase in demand, the price of the option contract will likely decrease. The higher supply would surpass the demand, creating downward pressure on the price.
3.Demand and Supply Rise Equally: If the increases in demand and supply are roughly equal, the price of the option contract might remain stable. The increased supply would offset the increased demand, leading to little or no change in the price.
In general, the price movement will depend on the relative changes in demand and supply.
The market will adjust to find a new equilibrium price where the increased quantity demanded
equals the increased quantity supplied.
What effect on price of a option contract when demand and supply maintain constant?
When the demand and supply for an option contract remain constant,
the price of the option contract is likely to remain stable. This stability occurs because
there is no new pressure to change the price: the quantity of option contracts that buyers
want to purchase is exactly matched by the quantity that sellers want to sell.
In this situation, the market is in equilibrium, and the price reflects a balance between
supply and demand. Without any changes in external factors that could influence demand or supply
, the price should stay relatively unchanged.
What effect on price of a option contract when demand of its down and supply down?
When both the demand and supply of an option contract decrease, the effect on the price can vary depending on the relative magnitudes of the decreases in demand and supply:
1. Demand Decreases More Than Supply: If the decrease in demand is greater than the
decrease in supply, the price of the option contract will likely decrease. This is because the
reduction in demand outpaces the reduction in supply, leading to downward pressure on the price.
2. Supply Decreases More Than Demand: If the decrease in supply is greater than the decrease
in demand, the price of the option contract will likely increase. In this case, the reduction
in supply is more significant, creating upward pressure on the price.
3.Demand and Supply Decrease Equally: If the decreases in demand and supply are roughly equal,
the price of the option contract might remain stable. The reduced supply would offset the
reduced demand, leading to little or no change in the price.
In general, the price movement will depend on the relative changes in demand and supply.
The market will adjust to find a new equilibrium price where the reduced quantity demanded
equals the reduced quantity supplied.
What effect on price of a option contract when demand of its down and supply rise?
When the demand for an option contract decreases and the supply increases, the price of the
option contract will likely decrease. This scenario is driven by the following factors:
1. Decreased Demand: Fewer buyers are interested in purchasing the option contract, reducing the
overall competition for it.
2. Increased Supply: More sellers are willing to provide the option contract, increasing the
availability of it on the market.
The combination of lower demand and higher supply creates a surplus of option contracts.
Sellers may need to lower the price to attract buyers, leading to a decrease in the price of
the option contract. This situation is a classic case of supply outstripping demand, resulting
in downward pressure on prices.
In conclusion, the price of an option contract is significantly influenced by the
interplay between demand and supply:
Phenomena 1: When demand rises and supply decreases, the price of the option contract increases. This is due to scarcity driving up competition among buyers.
Phenomena 2: When both demand and supply rise, the price effect depends on which factor increases more. If demand rises more than supply, the price increases. If supply rises more than demand, the price decreases. If both rise equally, the price remains stable.
Phenomena 3: When demand and supply are constant, the price remains stable, reflecting market equilibrium with no external pressures altering the balance.
Phenomena 4: When both demand and supply decrease, the price effect varies similarly to Phenomena 2. If demand decreases more, the price decreases. If supply decreases more, the price increases. If both decrease equally, the price remains stable.
Phenomena 5: When demand decreases and supply increases, the price of the option contract decreases due to a surplus created by higher availability and lower competition.
These phenomena underscore the fundamental economic principles of supply and demand, illustrating how shifts in these factors determine market prices and drive equilibrium adjustments.
Probability is a branch of mathematics that deals with the likelihood of different outcomes.
It's used to predict how likely events are to happen. Here are some key concepts:
1. Experiment: An action or process that leads to one or more outcomes. For example,
flipping a coin or rolling a die.
2. Sample Space (S): The set of all possible outcomes of an experiment. For a coin flip,
S = {Heads, Tails}.
3. Event (E): A subset of the sample space. For example, getting heads when flipping a coin.
4. Probability of an Event (P(E)): A measure of the likelihood that the event will occur,
defined as the number of favorable outcomes divided by the total number of possible outcomes.
\[
P(E) = \frac{\text{Number of favorable outcomes}}{\text{Total number of possible outcomes}}
\]
Probability measure the direction and rate of change of price (speed) in numeric form.