Question

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.

Answer 1

A call option on a stock selling at $40

Step-by-step 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.