Question

Which of the following statements is true?

Multiple Choice

For both calls and puts an increase in the exercise price will cause an increase in the option price.

For both calls and puts an increase in the time to expiration will cause an increase in the option price.

For calls, but not for puts, an increase in the time to expiration will cause an increase in the option price.

For puts, but not for calls, an increase in the time to expiration will cause an increase in the option price.

Answer 1

Option B is correct.

For both calls and puts an increase in the time to expiration will cause an increase in the option price

Option are priced by a term called Premium. Premium consists of two components : -

• Intrinsic Value
• Time Value of Money

The intrisic Value is the difference between Strike Price and the Current Price and the over and above value of any option i.e. Call or Put is the time value of money. As more as the time increase or the Far the Maturity is the Value of Premium will be higher whether it is Call Option or Put Option.