Question

9. Which one statement is true: a. European options are not traded in America b. the price of stock and puts move in the same direction- both up or both down c. options never expire worthless d. the price of an option should decay more rapidly the closer it gets to expiration

Answer 1

9)

A) It is false that European options are not traded in America. These options have nothing to do with their names.

European call option gives the buyer the right to buy the stock at a pre determined future date and price. These are done OTC(Over The Counter) and not traded over a market.

Over the counter refers to the process of how securities are traded for companies that are not listed on a formal exchange via a broker dealer network.

Therefore we can say that European options are traded all over the world.

B) It is false. They move in opposite directions. This is because as the price of the stock rises, the price of put option falls.

Put option allows to seller to sell the stocks but there is no obligation. A put option is inversely related with the stock price.

C) It is false. There are times when options expire worthless.

An option will have no value if the underlying security is below the strike price in the case of call option at expiration. In this case, the option expires worthless and ceases to exist.

D) It is true. Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an option's time to expiration draws closer sinse there's less time to realize a profit from the trade and less time for an investor to earn a profit from the option.