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23 October, 12:10

Which security should sell at a higher price: A call option on a stock selling at $40, or a call option on another stock selling at $50 (all other relevant features of the stocks and options is assumed to be identical.) Explain.

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  1. 23 October, 14:57
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    A call option on a stock selling at $40

    Explanation:

    A call option confers a right and not the obligation on it's holder to buy a security at a pre determined price known as strike price or exercise price before or at expiration date.

    A call buyer exercises his right when strike price is lower than the current market price.

    Call buyer's profit is expressed as;

    =Current Market Price - Strike Price - Option premium paid

    The lower the strike price, the higher the stock sells since there exists possibility of earning a greater profit.
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Home » Business » Which security should sell at a higher price: A call option on a stock selling at $40, or a call option on another stock selling at $50 (all other relevant features of the stocks and options is assumed to be identical.) Explain.
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