Can someone explain how carrying costs of holdings the underlying asset increases the value of call options and decreases the value of put options?
If you own 100 oz. of gold then in a month you will have 100 oz. of gold less the storage costs.
If you own a call option on 100 oz. of gold that expires in a month, then in a month you can have 100 oz. of gold and all of the storage costs safely still in your pocket.
The call saved you the storage costs; that’s worth something.
What about a put option then? The call makes sense to me. If you go long an asset, you have to pay carrying costs. An option forgoes this. Hence this is worth something… which if you think about it, is equivalent to owning an asset, because just as with an asset that you need to pay storage costs for, if you buy an option, you need to pay for this benefit also, hence you still kinda pay for carrying costs with an option also. Now that I think about it, the carrying costs would probably put an upper limit on this premium that you need to pay for an option.
But a put… not so much. If you short sell an asset, you don’t have to pay carrying costs. If you buy a put option, you similarly don’t have to pay carrying costs. Where’s the value in that?
You do if you own the asset that you’re going to deliver against the put.