Options are often referred to as contingent claims or wasting assets. In the fir

Question

Options are often referred to as contingent claims or wasting assets. In the first case, because their value is dependent upon the value of the underlying stock, and in the second case, because their value is dependent on the length of time until the option expires. Option values are also affected by several other factors, and these factors will affect the value of call options and put options differently. However, understanding the effects of these different factors is the first step in understanding option pricing models The following table shows how increases in the given factors on the left affect the value of a call option. For each factor, indicate whether an increase in its value causes the value of the call option to increase or to decrease Causes the Value of the Call Option To Increases in this factor: Underlying stock price Exercise price Time to expiration Volatility Increase Decrease Suppose Tiana bought an option to buy the stock of Company A at an exercise price of $25.00 per share. Tiana bought the option on June 10 and it doesn't expire until September 9. Company A's stock was trading at $22.30 per share on the day that Tiana bought the option Ken also bought a call option for the same company on the same day with the same exercise price and underlying stock as Tiana did. But the option that he bought expires on August 15. If all other things are the same, who is likely to have paid more for the option? Tiana Ken This is true because as the time to expiration increases, option buyers realize that there is a Company A's stock to increase in value. Thus, all other things being equal, the longer the time remaining for expiration, the chance for the call option's value

Explanation / Answer

Call option value is directly related to spot price, risk free rate, volatility, time to expiration and inversely related to strike or exercise price

So, Increase in:

Underlying stock price would cause the value of the call option to increase

Exercise price would cause the value of the call option to decrease

Time to expiration would cause the value of the call option to increase

Volatility would cause the value of the call option to increase

As Tiana's time to expire is more than Ken's, option value of Tiana would be more than Ken's hence Tiana would have paid more

higher chance, higher

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