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Consider two European put options, written on the same asset, with the same maturity, but different strike prices: K1< K2

Which option is more expensive?

Then Answer the same question, but using call options instead.

It made sense to me that a put option - a sell option, with a higher strike price, would be worth more, hence is more expensive. And a call option - a buy option, with a higher strike price would be bought for more, so again is worth more and is more expensive? Or is that completely wrong?

Andy
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    Think about what a call at strike $K$ is. It's the right to pay $K$ for the asset at some future time. Would you prefer to pay a lot for the asset or would you prefer to pay less? – lulu May 08 '16 at 13:06
  • @Lulu, so i would want to buy for less, and because the demand would be for a lower price, the lower strike would have greater value. yeah? – Andy May 08 '16 at 13:52
  • That is correct. Another way to say the same thing; in all scenarios the call with the lower strike gives a greater or equal payout, hence it must cost more. – lulu May 08 '16 at 13:55
  • @Lulu, thanks, that's cleared it up for me! – Andy May 08 '16 at 13:57

2 Answers2

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A European put option gives you the right to sell an underlying asset at a certain price (the strike price) at a certain time (the expiry date). You would want to sell an asset at a higher price. Therefore the put option with a higher strike price would be more expensive, all other things being equal.

A European call option gives you the right to buy an underlying asset at a certain price (the strike price) at a certain time (the expiry date). You would want to buy an asset at a lower price. Therefore the call option with a lower strike price would be more expensive, all other things being equal.

Deepak
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This is my take: for a call, we are looking at Spot----L----H (we move from spot to higher strike, in that order), where L and H are lower and higher strikes. The probability of hitting L is higher than hitting H and thus call with lower strikes are quoted higher.

For put, we have L---H---Spot. The probability of hitting H is higher and thus puts with higher strikes are priced higher.

We have to think of which direction on x-axis (the price) we are moving and how that is going to impact the call or put.

NikkoTikko
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