0
Does a higher exercise price increase the value of a call option?
Wiki User
∙ 12y ago
No, just the opposite. It decreases the value.
Options have two "Prices" associated with the financial instrument. STRIKE PRICE and PREMIUM PRICE. When you use the term "Excercise Price" you are referring to the "STRIKE PRICE."
A CALL option is the right to BUY a specific instrument at a specific price. So having the "RIGHT TO BUY LOWER" is always worth more than the right to buy higher.
To clarify, if your company offers you 3,000 options at an excercise price of $2, those are worth vastly less than the same options with an excercise price of ZERO. Here's why:
An options "Value" is known as the Option Premium (OP). OP is what the option is worth.
Time Value + Intrinsic Value = Option Premium
So if the market value of ABC Company is $5 and your options strike price is $0 you can cash those in for $5 a share right now.
However, if your Option Strike Price is $4 in the same market (ABC stock price is $5) then you only get a dollar on exercision.
Who gets the other $4? The company.
- - - - -
"Higher exercise price" (traders would say "higher strike price") means nothing in and of itself. The big question is, what is the difference between the strike price and the stock price at the time you bought the call? Or, in trader's lingo, how far out of the money is the option?
People who sell ("write") options are gambling, and the thing they are most hoping for is the price of the stock staying below the strike price. If this happens the option expires worthless and the writer keeps the premium. That's the ideal.
The closer the two numbers are, the more likely the option will be exercised and, therefore, the more likely you're going to have to cough up either cash or stock. SO...the more likely the option is to be exercised, the more expensive it will be.
Let's take two options priced at $340.50 per share. That is a ton of money so obviously the premium should be pretty low, right? Not if you're buying calls on Apple--$340.50 was the Friday, May 13 closing price so this call would be at-the-money and therefore very expensive. As in 10 percent, or more, expensive.
OTOH, if you were buying $340.50 Caterpillar calls, assuming anyone would sell you a $300-plus call on a $106 stock, you could get into those for about a quarter per share.
Wiki User
∙ 12y ago
Add your answer:
Earn +20 pts
What is a stock option and how do you use it?
Stock options allow you to buy stock in a company at a certain price, no matter what the price of the stock is currently. There is usually a time period associated with the offer. Sometimes this could be a sweet deal (if the stock is currently higher than the option) to worthless (if the option price is higher that the current stock price). You also don't have to have the funds to exercise the option, you can have a brokerage company exercise the option, then sell the stock at the higher price, with the difference being your profit.
What is excersing a option?
Exercising an option means exercising your rights to buy or sell the underlying asset in accordance to the parameters of the option. When you exercise a call option, you will get to buy the underlying stock at the strike price no matter what price the stock is trading at in the market. When you exercise a put option, you will get to sell the underlying stock at the strike price no matter what price the stock is selling at in the market. In both cases, the option you own disappears from your account.
What does it mean that a stock option is in the money?
An in-the-money option is one that makes financial sense to exercise. In-the-money puts are ones where the security's open-market price is lower than the option's strike price. In-the-money calls are ones where the security's open-market price is higher than the option's strike price.
What causes an increase in the value of an option?
An increase in the market price of the item the option is for.
What is the Relationship between option price and exercise price?
For a call option, the option price is convex and decreasing with increasing strike price, assuming a fixed maturity and same underlying price.
What happen if spot price remains above spot price in call option in stock?
If the spot price of the stock exceeds the "strike price" in the call option, the option is in-the-money and you can exercise it. But if you have a choice, wait to exercise it until the stock's spot price exceeds the strike price enough to cover the premium. Example: the strike price is $40 and the premium was $2. In order to make money on this option, the stock price needs to be over $42--enough to pay for the stock and replace the money you spent buying the option.
What of these is most likely to lead to an increase price of a company's stock?
Answer : Its profits increase. Explanation : When a company is more profitable, it's stock is in higher demand, and higher demand means a higher price.
When should you not exercise a call option?
You certainly should not exercise a call option when the stocks price is above the strike price. If you really want the stock, go and buy it at the market price. For example, if you own an option with a strike price of $15 and the stock is trading at $9, why would you pay $15 to buy a stock that you could only buy or sell for $9. That would be irrational.
Current stock price is 41 annual risk free rate is 6 and 1 year call option with a strike price of 55 sells for 7.20 what is the value of a put option?
What is the exercise price of the put?
Options selling at prices higher than their exercise values?
Option value is composed of two components : Option value = Intrinsic value + time value Intrinsic value is the amount by which the option is in the money and given by the formula Max (0, S-X) Time value of option - this value depends on the time until the expiration date and the volatility of the underlying instrument's price. The time value of an option is always positive and declines exponentially with time, reaching zero at the expiration date. If the option is out of money its intrinsic value will be 0 but will still have time value of money and hence options sell higher than their exercise price. Read more: http://www.justanswer.com/questions/1v2lv-options-sell-prices-higher#ixzz0NUj0iVGm
What is the vega of an option?
Option Vega is the change in the value of an option for a 1-percentage point increase in implied volatility, i.e. the first derivative of the option price with respect to volatility.
How does the put option values fall and rise while call options values rise and fall as the rerlevant stock prices rises?
The Payoff i.e. profit for a Call Option is St-X where St is the market price at time t and X is the exercise price. Assuming that it is an American Style option where it can be exercised at any time, If St is significantly greater than the exercise price,X, (the agreed price to buy an option at) then if the option holder exercises it immediately they will be 'in-the-money.' This means it has a high intrinsic value which causes a rise in value for the option. The Payoff for a Put Option is X-St where X=exercise price and St equals market price at time t. If the market price increases the gap between X and St (Payoff or Profit) reduces or if X<St then they will be making a loss. This will mean it will have a low intrinsic value (value if exercised immediately) therefore the value of the option will fall.
