Of the following options, which would you expect to have the highest option price?
a. A European 3-month put option on a stock whose market price is $90 where the strike price is $100. The standard deviation of the stock price over the past 5 years has been 15%.
b. A European 3-month put option on a stock whose market price is $110 where the strike price is $100. The standard deviation of the stock price over the past 5 years has been 15%.
c. A European 1-month put option on a stock whose market price is $90 where the strike price is $100. The standard deviation of the stock price over the past 5 years has been 15%.
Option Price = intrinsic value + time value of the option We know that a put option is in the money if the strike price is higher than the market price and that the time value of an option increases with the volatility of underlying asset and the time to expiration. For example :Option A: In the money - intrinsic value = $10.