Week 2: Properties of stock options

Question 1

The effect on price of a call option if there is a change in stock prices?

Answer 1

• max(ST – K, 0) the higher the ST fora given K and T, the higher would be the payoff > the more valuable the call option > higher call price

Question 2

The effect on price of a put option if there is a change in stock prices?

Answer 2

• max(K - ST, 0) the higher the ST for a given K and T, the lower would be the payoff > less valuable the put option > lower put price

Question 3

The effect on price of a call option if there is a change in strike prices?

Answer 3

• max(ST – K, 0) the higher the K for a given ST and T, the lower would be the payoff > less valuable the call option > lower call price

Question 4

The effect on price of a put option if there is a change in strike prices?

Answer 4

• max(K - ST, 0) the higher the K for a given ST and T, the higher would be the payoff > the more valuable the put option > higher put price