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Which one of the following call options should have a higher premium? Why? (A) A 30-strike...

Which one of the following call options should have a higher premium? Why?

(A) A 30-strike call option                 (B) A 20-strike call option

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Answer #1

Call option premium increases with the increase in the price of the underlying stock. In the given case the premium of "A 20 strike call option" will be higher as compared to "A 30 strike call option"

Say for an example the price of the underlying stock is 10 -

Price of 20 strike price will be higher as compared to 30 as the when the price will will rise the stock will be more nearer to 20 strike price. As the probability of attaining strike price of 20 is higher so premium would be higher.

Say for an example the price of the underlying stock is 50 -

Again, price of 20 strike price will be higher as compared to 30 as the difference between the strike price and the spot price will be more incase of 20 strike price.

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