6 nov mock test

AMITAG1990
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6 nov mock test

Postby AMITAG1990 » Fri Nov 09, 2012 4:38 pm

A stock is trading at $55 and a put option on the stock has strike price of $50. If the stock price increases to $57 then which of the following is most likely change in the option price?
Choose one answer.
a. Increase by $0.40
b. Decrease by $0.40
c. Increase by $1.60
d. Decrease by $1.60

Solution is.
The put option is already out of money and if stock price increase it goes more out of money hence the option price will decrease. Since the put option is out of money, the delta will be between 0 and -0.5 hence option price will change in the range 0 and (57 – 55)*0.5 = 1. Hence $0.40

But as per my arguement delta for OTM put is between -1 to -0.5, so answer should should be D.. Please tell me what is right.?

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balajismz
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Re: 6 nov mock test

Postby balajismz » Fri Nov 09, 2012 5:08 pm

Well in this case S and X are very much close to each other, so if not -0.5, delta should be somewhere close to it.

So I would say the decrease in option price should be around 0.4

Balaji

AMITAG1990
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Re: 6 nov mock test

Postby AMITAG1990 » Fri Nov 09, 2012 5:45 pm

balaji you cann't say anything Ad hoc, As per their explanation ans should be 1.6.. just they have taken wrong value.. Even i donn't know what should be the approach..

swarnendupathak
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Re: 6 nov mock test

Postby swarnendupathak » Fri Nov 09, 2012 9:28 pm

Hi,
As the So is 55 & K = 50, so PUT option is already at OTM so with further price rise the option will move to more OTM, and price will decrease as the value of the option get decreases, So delta will vary within a range of 0 to -0.5, So, the delta should be more than -0.5, let say -0.3, so the price change would be 2*-0.3= -0.6. If the answer to be option D, means 1.60, then delta should be -0.8, which is less than -0.5, which can't be as the option is going more out of money. So the correct answer is B.

Swarnendu


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