In the below question, you are asked to compare two options with parameters as g

Question

In the below question, you are asked to compare two options with parameters as given.  The risk- free interest rate for all cases should be assumed to be 2%.  Assume the stocks on which these options are written pay no dividends.

Put      T          X          Standard Deviation   Option Price

A          .5         50       .20                               $5

B          .5         50       .20 $8

Which put option must be written on the stock with the lower price?

i.                A.

ii.              B.

iii.             Not enough information.

Explanation / Answer

With all other conditions same, higher the put option price, lower the stock price. Therefore, option (ii) B is the correct answer.

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