Question

1. Using change in premium, predict the new option value in Apple using strike 230, for four days and a loss of $5.50 in Apple.

Answer 1

The main factors affecting an option's price are the underlying security's price, moneyness, time to expire and implied volatility.

An option premium comprise intrinsic value and extrinsic value (i.e. time value and implied volatility).

Factor: Time to expire:

Since there are only 4 days left for expiration, the time value is almost zero.

Factor: Moneyness

If the option is in the money or near in the money, the option premium will decrease by $5.5 if it is a call option, however, the option premium will increase by $5.5 if it is a put option.

However, if the option is out of the money and if it becomes further out of the money then there will be no change in premium. Such an option loses its intrinsic value and only has time value.

Factor: Implied volatility

If the implied volatility is higher than the average volatility of the stock, which usually happens if there is expectation of certain market event, for example, Apple's quarterly earning, Fed report on interest rate, labor news, etc; then the option price will change. There is no such information given in the questions hence it can be assumed that there is no effect of implied volatility on the premium change.