Option prices are homogeneous of degree one in stock price and strike price. What does this imply?
A) That if you double the stock price and the strike price the option price will remain unchanged.
B) That if you double the stock price the option price will double.
C) That if you double the stock price and halve the strike price the option price will double
D) That if you double the stock price and strike price the option price will double.

Question

Quizplus · Accepted Answer

Homogeneity of degree one means that if all inputs are scaled by a certain factor, the output (in this case, the option price) is scaled by the same factor. Therefore, doubling both the stock price and the strike price doubles the option price.

Option Prices Are Homogeneous of Degree One in Stock Price