Question

Given the following data as of the close of trading on 10/26/18:

Quest Diagnostics (DGX): 91.47

Options on DGX: American, expire January 18, 2019

c	X	p
23.7	70	0.35
17.5	105	14.2

Which of the options in the table above is priced above its lower bound?

		The put
		Both options
		Neither option
		The call

Answer 1

Ans) Both Options

For at the money and out of money options lower bound is 0. Here out of money call option with strike price $105 is trading at 17.5 $ which is above 0 and out of money put option with strike price $ 70 is trading at 0.35 $ which is above 0

For in the money call option lower bound = Spot price - strike price

For in the money call option with strike price of $ 70 , lower bound is = 91.47 - 70 =21.47 $

and in the money call option with strike price of $ 70 is trading at 23.70$ . Thus above lower bound

For in the money put option lower bound = strike price - spot price

For in the money put option with strike price of $ 105 , lower bound is = 105 - 91.47 =13.53 $

and in the money put option with strike price of $ 105 is trading at 14.2$ . Thus above lower bound