Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.
A) An increase in the stock price will increase the value of your put and decrease the value of your call.
B) Both a May 45 put and a May 45 call will have higher values than your May 40 options.
C) The time premium on both your put and call are less than the time premiums on equivalent June options.
D) A decrease in the stock price will decrease the value of both of your options.
E) You cannot profit on your position as your profits on one option will be offset by losses on the other option.

Question

Quizplus · Accepted Answer

Explanation: The value of options, both puts and calls, generally includes a time premium, which reflects the additional value of having more time until the option's expiration. The longer the time until expiration, the higher the time premium, because there's a greater chance for the underlying stock to move in a favorable direction. Therefore, equivalent June options, which expire later than May options, would have higher time premiums than the May options you own.

Assume That You Own Both a May 40 Put and a May