Question

a.    As the stock’s price decreases, a call option on the stock ___________ in value.

b.    As the stock’s price decreases, a put option on the stock ___________ in value.

c.     Given two put options on the same stock with the same time to expiration, the put with the lesser strike price will cost ________ than the put option with the lower strike price.

d.    Given two call options on the same stock with the same time to expiration, the call with the lesser strike price will cost ________ than the call option with the lower strike price.

e.    Given two call options on the same stock with the same strike price, the call with the shorter time to expiration will cost ________ than the call option with less time to expiration.

f.      As the stock price becomes less volatile, then a call option on the stock ___________ in value.

g. How and why would the premium on an option differ depending on whether the stock trades above or below the overall beta level for the market?

Answer 1

A. Decreases.

As the call option premium is stock price - exercise price. So if stock price decreases Call option value decreases.

B. Increases

As the put option premium is exercise price - stock price. So if stock price decreases Call option value decreases.

C. More

As the strike price decreases, more and more, put option value decreases

D. Less

As the strike price decreases, more and more, call option value increases

F. Decreases

The lower the volatility the less is the option premium