Yallow Company's stock is trading at $30 a share. Call options on the company's stock are also available, one with a strike price of $25 and one with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options?
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If Yallow's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5. |
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The options with the $25 strike price will sell for less than the options with the $35 strike price. |
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The options with the $25 strike price have an exercise value greater than $5. |
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The options with the $35 strike price have an exercise value greater than $0. |
| None of the above. |
Correct answer is B, if the stock moves up by $5 then new stock price will be $35.
Value of 1st call option=max (spot price-exercise price,0)
Value of 1st call option =max (35-25,0)
Value of 1st call.option=max (10,0)=10
Value of 2nd call option=max (35-35,0)=0
Therefore answer is C since value of $25 call option will be greater than $5 because if anyone buy that option he can buy that stock at price of $25 which currently cost $35 so call option value should be higher than $5 or close to $10
Option A is incorrect since value of $25 call option will have more value not less
Option C is incorrect since $35 call option is at the money so call option will have zero value
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