Question

Consider two European call options on the same stock with the same strike price of $40. One option has a maturity of 1 month and the other has a maturity of 3 months. Which option should be more expensive?

1-month option

3-month option

The two options should have the same premium

More information is needed to determine which option should be more valuable

Answer 1

ANSWER: 3 month option

A European call option gives the holder/owner , the right but not the obligation to call & buy the underlying asset/stock (from the current owner) at an agreed price ,called the strike price on an agreed date,called the expiration date.This option can be exercised only on the expiration date, not any time before or after.

So, the option-holder ,elects to call for the asset when the market price is ruling higher--to subsequently sell at that market price --and thus make a profit.

If the market price or the stock price is less than the option-holder's exercise/strike price--logically he will not exercise his option at all-- for then, he will end up in a loss .

That said, giving time value to money,more the time to maturity or expiration,the buyer of the option has more time till expiration ,so he pays more premium--- so that he can take advantage of the maximum market price & make more profit on selling the under-lying stock.

So, 3-month option is more expensive.