Value of Options

Question 0

Strike Price increases

Answer 0

The strike price of a call option is the price at which the underlying asset can be purchased.
-> Call options become less valuable.

The strike price of a put option is the price at which the underlying asset can be sold.
-> Put options become more valuable.

Question 1

Price of the Underlying Asset increases

Answer 1

Increases the chance that the call option will be exercised and increases the expected payoff from its exercise.
-> Call options become more valuable.

Decreases the chance that the put option will be exercised and decreases the expected payoff from its exercise.
-> Put options become less valuable.

Question 2

Time-to-expiration increases

Answer 2

Both call and put AMERICAN options become more valuable.

Normally EUROPEAN call and put options become also more valuable. However, this is not true when investors expect large future dividend payments.

Question 3

Volatility of the Underlying Asset increases

Answer 3

Both call and put options become more valuable.

Exercise becomes more likely and the expected payoff from the exercise increases.

Question 4

Risk-free Interest Rate increases

Answer 4

Stock prices grow at a higher rate when the interest rate increases.

• > call options become more valuable
• > put options become less valuable

However, a higher interest rate corresponds to a higher discount rate that is applied to future cash flows.