Question

Suppose there are call options available for Tesla. Tesla stock is currently trading at $254.56 per...

Suppose there are call options available for Tesla. Tesla stock is currently trading at $254.56 per share.

Which of the following call options on Tesla will have the highest premium?

1.

A call option with a Dec. 1, 2019 expiration and a strike price of $255.00.
2.

A call option with a Dec. 1, 2019 expiration and a strike price of $265.00.
3.

A call option with a Mar 15, 2020 expiration and a strike price of $255.00.
4.

A call option with a Mar 15, 2020 expiration and a strike price of $265.00.
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Answer #1

Correct option is "4"

An option premium comprises of two components  :

1)Time value of money :larger the option contract time to maturity, higher is the option premium and lower the time to maturity, lower will be the premium.

2)Difference between strike price of option contract and spot price.

Higher the difference, higher will be the premium

In the current scenario, option 4 will have the highest premium as it has larger time period(15 March 2020) and higher difference than other options( 265-254.56)

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