Determining Maximum Loss of Stock Option Contract in Tehran Stock Exchange: The Result of Stock Price Movement Opposite to the expectations and Unexercised Contract

Although stock option is one of the instruments of risk coverage in stock markets, it may incur losses on its holder. Volatility is one of the factors that expose this loss to variations. Stock volatility is a means of displaying the degree of uncertainty about future variations in stock returns. With increased volatility, stock price is more likely to increase or decrease while the situation is different for the individual who holds the purchase or sale option. The present study aims to determine the maximum loss of stock option contract over a period of time due to stock price movement opposite to the expectations and unexercised contract. To this end, stock option prices were calculated for 48 companies based on the computation of volatility and the standard error of estimate using software and binomial tree model. The results of this descriptive study show that the maximum loss induced by unexercised stock option contract does not exceed the price paid for the contract; however, with stock price volatility, the rate of loss varies. Delta and Vega parameters, calculated in the present study, measured this volatility. Eventually, some recommendations are made for future studies.