Question

Digital Datawhack stock down by $3, from $50 to $47. "Crunch" Murdoch owns call options on Datawhack, which he bought two months ago for $4 per share. They expire in six months, and have an exercise price of $55. What is the theoretically possible response of the option value (on a per-share basis), to the recent move of the stock?

Answer 1

Theoretical possible responses of the option value to the recent move on the stock will be as follows-

A. The option holder is holding a call option which will mean that he is betting for the upside of the stock and he will gain if the stock is expiring on the upside above the strike price of his call.

B.in this case, it can be seen that the stock has fallen down from the current market price to 47 in 2 months and it will mean that the option value will be decreasing because there would be fall in intrinsic value of the option.

C. There would also be fall in the time value of the option because two months have already elapsed and there are only four months to exercise the contract so there is decrease in the time value of the call option also.

D. Overall, it can be said that the time value and intrinsic value of the option will make the total value of the option decrease because the stock has gone down from the current market price and it is is lower than the strike price show so it would be taken negatively.