Chapter 03 · Section 3.1
Premium
Time to Expiration and Volatility of the Underlying Asset Look at the following two options:
Option A Option B
Option type: American Call American Call
Exercise price: $ 290 $ 290
Underlying asset: stock A stock A
Price of stock A: $ 300 $ 300
Expiration date: June September
Today's date: February February
Should the premium of option B be greater than the premium of option A? Please answer yes or no.
a) no
b) yes
The holder of option B can wait for a rise of stock A until September instead of June. Will he be willing to pay more for this additional right?
The later the expiration date, the greater the time value