Question

Q5. You are considering a call option on a stock that does not pay dividends. What happens to a call option value if this stock starts paying dividends?

Q6. A put option and a call option have the same maturity and strike price. If they also have the same price, which one is in-the-money?

Answer 1

Q5. a call option on a stock that does not pay dividend will have a higher value, than the call option on a stock which pays dividends. as the price of the stock falls after a dividend is paid. the call option becomes less valuable.

for example, a call option is at strike price of $50, the stock is trading at 60. the value of the call option is 10 ( Stock price - strike price) as the dividends are announced, suppose $2 , the stock price falls and is now $58, the value of the call option is now $8. so the value of the call option falls once, the stock starts paying dividends.

Q6. the premium paid on the option is dependent on it's strike price and the time to expiration. here, the strike price is same, and the time to expiration is also same. sometimes, such options which have same underlying stock, same strike price have different prices, due to the time to maturity,the one having greater time to maturity will have a higher premium as there is more time available for the stock to become in the money. here, the time to maturity is same so time premium is ruled out. no information is provided about the price of the underlying stock, so we cant say as to which of options is in the money. both the options are at the money. and depending upon the movement of the stock price, one of the option will be in the money.

when an investor buys a put and call at same strike price , same price. it is a strategy known as straddle. and the options are both at the money options.