Consider two options, X and Y. Option X has a strike price of S40 and is selling in the marketplace for $4. Option Y has a strike price of $32 and is selling in the market place for $3. The underlying assets for the options, Stock X and Stock Y, have a current market price of $43 and $29, respectively. Which of the following are most likely TRUE about Option X and Option Y?
Click on the arrows to vote for the correct answer
A. B. C.C
To determine the characteristics of Option X and Option Y, let's analyze the given information:
Option X:
Option Y:
To determine if an option is a call or put, we need to compare the strike price to the current market price of the underlying asset.
For Option X: The strike price of $40 is higher than the current market price of Stock X ($43). This means that Option X is an out-of-the-money call option since it would not be profitable to exercise the option and buy the stock at a higher price ($40) when it is available in the market at a lower price ($43). Therefore, Option X is an out-of-the-money call.
For Option Y: The strike price of $32 is lower than the current market price of Stock Y ($29). This means that Option Y is an in-the-money put option since the option holder has the right to sell the stock at a higher price ($32) when the market price is lower ($29). Therefore, Option Y is an in-the-money put.
Now let's analyze the market prices of the options:
Option X is selling in the marketplace for $4, while Option Y is selling for $3. The market price of an option is a reflection of its intrinsic value (the difference between the strike price and the current market price of the underlying asset) and its time value (the additional value attributed to the option due to factors like time to expiration and market volatility).
Given that Option X is an out-of-the-money call and Option Y is an in-the-money put, it is reasonable to expect that the in-the-money put option (Option Y) will generally have a higher intrinsic value than the out-of-the-money call option (Option X). However, without additional information about the time to expiration and market volatility, we cannot conclusively determine the relationship between their market prices.
Therefore, the most likely TRUE statement about Option X and Option Y is:
C. Option X is an out-of-the-money call, and Option Y is an in-the-money put.