3. Determinants of stock option premiums

Consider an American-style call option on Southpaw Incorporated stock. If the market for Southpaw Incorporateds call options has historically only traded options with one-month expirations but suddenly the only call options being traded have three-month expirations, what would you expect to happen to the equilibrium price (premium) and quantity associated with the American-style call option?

A) The price of the American-style call option would decrease.

B) The price of the American-style call option would increase.

Consider an American-style put option on Ballister Incorporated stock that has a premium of $0.05 per 100 shares and an exercise price of $22 that expires in a month. Suppose the value of the stock is currently $32 per share but suddenly increases to $37 per share. If options continue to be sold with an exercise price of $22 and an expiration date in one month, what would you expect to happen to the price of the American-style put option?

A) The price of the American-style put option would decrease.

B) The price of the American-style put option would increase.