Question

An American put option on a share of stock is more likely to be exercised early if

Group of answer choices

The underlying stock has high volatility.

The underlying stock price is equal to the strike price of the option.

The underlying stock price is much higher than the strike price of the option.

The underlying stock price is much lower than the strike price of the option.

Answer 1

An American put option on a share of stock is more likely to be exercised early if the underlying stock price is much lower than the strike price of the option

An American option can be exercised anytime before maturity. A put option gives its owner the right to sell the underlying asset at a predecided price called the strike price before maturity. However, if the underlying stock price is much lower than the strike price, the owner will be able to sell the stock at a price greater than the current stock price. Hence exercising the option will be profitable for the option owner.

Answer -> The underlying stock price is much lower than the strike price of the option (4th option)