The following are prices of options traded on Microsoft Corporation, which pays no dividends.
K=85 K=90 K=85 K=90
1 month 2.75 1.00 4.50 7.50
3 month 4.00 2.75 5.75 9.00
6 month 7.75 6.00 8.00 12.00
The stock is trading at $83, and the annualized riskless rate is 3.8%. The standard deviationin the stock prices (based upon historical data) is 30%.
a. From the options above, identify those that are “in the money” and those that are “out of the money.”
b. Explain why the 1-month call option with a strike price of $90 has value.
c. Explain why the 3-month and 6-month options have prices or premiums that are higher than those for the 1-month options.
d. Estimate the value of a three-month call, with a strike price of $85.
e. Using put-call parity, estimate the value of a three-month put with a strike price of $85.
This solution discusses option pricing.