Option trading
This is about the effect on interest rates on option value in trading. As an option trader you have to be aware of all the factors that effect the value of options. Interest rates have a fairly weak effect on the value of options. If you are a private or small investor the interest will have no significant impact on the value of your position. However, if you are a professional option trader you should consider the effect of the interest rate.
As you know the deliver of the underlying takes place in the future. This means that if you are long a call option you postpone the payment till the delivery date. If you are long a put option, you postpone receiving the payment to a later date. This cash flow issue means that you can make or loose money on the interest rate on the cash flow. The higher the interest rate, the higher the value of a call option. The higher the interest rate, the lower the value of a put option.
Let me illustrate this with an example:
Imagine you consider buying a put option. This option gives you the right to sell in the future. It’s kind of a price insurance. However, if you sell the underlying now you can put the money in the bank and earn interest on the money. Or invest it in stocks or bond or any other investment of your choice. Analogously, if you buy a call option you postpone the payment of the underlying and can put your money in the bank and earn interest on it till the delivery date.
So as you can see, all else equal, if the interest rate increases the value of call options increase and the value of put options decrease.