Consider two European put options, with maturities three months and six months on the same stock and same strike price. The stock pays no dividends. Which of the following statements is most accurate?
A) The three-month option must be worth more than the six-month option.
B) The three-month option must be worth less than the six-month option.
C) The three-month option must be worth less than the six-month option if the option is deep in-the-money.
D) The three-month option may be worth more than the six-month option.

Question

Quizplus · Accepted Answer

The value of an option is affected by several factors, including time to expiration, volatility, underlying stock price, and interest rates. Generally, a longer maturity option will have more value than a shorter maturity option because it allows the option holder more time for the stock price to move in their favor. However, there are situations where a shorter maturity option may be worth more, such as when the option is deep out-of-the-money and there is little chance of it being in-the-money at expiration. Therefore, the statement in option A) is not always true. Option B) is also not always true, as explained above. Option C) is incorrect because being deep in-the-money increases the value of the option and has no impact on the relative value of the two options. Hence, option D) is the correct answer.

Consider Two European Put Options, with Maturities Three Months and Six