A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.
A) spot and exercise; exercise
B) spot and exercise; spot
C) exercise and spot; exercise
D) exercise and spot; spot

Question

Quizplus · Accepted Answer

The lower bound of a put option premium is equal to the greater of zero and the difference between the exercise and spot prices. This is because a put option gives the holder the right to sell the underlying asset at the exercise price, which is only valuable if the spot price is below the exercise price. Therefore, the option premium cannot be negative or greater than the potential profit from exercising the option.

The upper bound of a call option premium is the spot price. This is because a call option gives the holder the right to buy the underlying asset at the exercise price, which is only valuable if the spot price is above the exercise price. Therefore, the maximum premium that an investor would be willing to pay for a call option is equal to the spot price.

A Put Option Premium Has a Lower Bound That Is