Explanation:
The increase in the strike price of an option will have a similar impact on American and European call options, and an opposite impact on American and European put options. An increase in strike price will decrease the likelihood of call options to be in the money, and thus, decrease the price of American and European call options. Conversely, an increase in strike price will increase the likelihood of put options to be in the money, and thus, it will increase the price of American and European put options. This is because the strike price is the price at which the holder of an option can buy (in case of a call option) or sell (in case of a put option) the underlying security when the option is exercised. For a call option, a higher strike price means that the option holder has to pay more to buy the underlying security, which makes the option less attractive and decreases its price. For a put option, a higher strike price means that the option holder can sell the underlying security at a higher price, which makes the option more attractive and increases its price.
Q.746 The prices of options on the stocks or equities are affected by a number of variables. Some variables directly impact the options while others have an impact on the underlying stock, which in turn also affects the prices of stock options. If the strike price of an option is increased, then which of the following depicts the accurate impact of this increase?
A
The increase in strike price will decrease the price of European put and American put options but increase the price of European call and American call options.
B
The increase in strike price will increase the price of European put and American put options but decrease the price of European call and American call options.
C
The increase in strike price will increase the price of European put and American call options but decrease the price of European call and American put options.
D
The increase in strike price will decrease the price of European put and American call options but increase the price of European call and American put options.
No comments yet.