InvestorQ : What happens to the price of a put option if the exercise price of the put option contract is moved up higher? # What happens to the price of a put option if the exercise price of the put option contract is moved up higher? Answer 1 year ago

The exercise price or the strike price is the price at which you contract to buy or sell the asset. In case of a put option, the exercise price or the strike price is the price at which you have contracted to sell the particular stock. Let us look at the impact of the above shift upward in exercise price on the value of the put option.

 Input Data Input Data Stock Price now (P) 120 Stock Price now (P) 120 Exercise Price of Option (EX) 125 Exercise Price of Option (EX) 130 Number of periods to Exercise in years (t) 0.08333 Number of periods to Exercise in years (t) 0.08333 Compounded Risk-Free Interest Rate (rf) 5.00% Compounded Risk-Free Interest Rate (rf) 5.00% Standard Deviation (annualized s) 30.00% Standard Deviation (annualized s) 30.00% Output Data Output Data Present Value of Exercise Price (PV(EX)) 124.4803 Present Value of Exercise Price (PV(EX)) 129.4595 s*t^0.5 0.0866 s*t^0.5 0.0866 d1 -0.3800 d1 -0.8328 d2 -0.4666 d2 -0.9194 Delta N(d1) Normal Cumulative Density Function 0.3520 Delta N(d1) Normal Cumulative Density Function 0.2025 Bank Loan N(d2)*PV(EX) 39.8844 Bank Loan N(d2)*PV(EX) 23.1645 Value of Put 6.8345 Value of Put 10.5911

In the above instance we have moved one notch higher on the put option from a 125 strike to a 130 strike. What happens to the value of the put option? There is a sharp increase in the value of the put option. Why is that so? A put option value is based on the positive gap between the stock price and the exercise price on the downside. When the exercise price or strike price is moved one notch higher, either the positive gap increases or the negative gap reduces. Either way it is positive for the value of the put option. That explains why the value of the put option has risen in the above case when the exercise price has moved up by one notch.

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