1.The following call options are available on Apple with July maturity. Are they correctly priced. S...
1.The following call options are available on Apple with July maturity. Are they correctly priced. S = $188 E1 = $175 E2 = $185 C1 = $10 C2 = $10.50
Homework Answers
No, the options are not correctly priced.
A call option gives the holder of the option to buy the stock at the strike price by the expiry date. For a buyer of the stock, lower the strike price, the better it is. So, he would be willing to pay a higher premium for a lower strike option as compared to a higher strike option.
In our case 175 strike call option is selling for $10 while 185 strike call option is selling for $10.50, clearly, the prices are not correct.
The 175 strike option should have been priced much higher compared to the 185 strike option.
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