The Value Derived From Exercising An Option Immediately Is The Exercise Value No Rational Investor Would Exercise An Op 1 (36.72 KiB) Viewed 44 times
The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $24.00: Stock Price ($) 16.00 Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 24.00 0.00 1.56 32.00 24.00 10.10 2.10 40.00 24.00 18.40 2.40 44.00 24.00 20.00 22.60 48.00 24.00 28.00 4.00 After two weeks, the stock price of ABC Corp. increases to $52.30. Suppose you purchased the shares for $32.00 and then sell the shares at $52.80; your rate of return will be on that transaction. After your analysis, you decided to purchase the option for $10.10, which gives you the right to buy ABC Corp.'s stock at $24.00. If you exercise the option by purchasing the stock at the strike price, you could immediately sell the share of the stock at its market price of $52.30. This will result in a payoff, and the rate of return on your option will be Answer the following questions, based on your understanding of options, option price, and exercise value. True or False: An option's price will always be greater than or equal to) its exercise value. • True or False: When you buy a put option, you are obliged to sell the underlying asset at the strike price by the expiration date. True or False: Options can be created and traded without an underlying asset.
4. Factors that affect the value of options Understanding how different factors affect the value of options is the first step to understanding option pricing models. When all other things are held constant, an option on an extremely volatile share of stock is worth than an option on a less volatile share of stock. As the exercise price of a call option increases, the price of the call option will However, as the length of the option period the call option price will increase. The call option price will decrease when the price of the underlying stock When is a call option considered to be in-the-money? When the exercise price is below the current stock price When the exercise price exceeds the current stock price
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