What are the boundaries for call option premium?

(3) The early exercise premium of an American put option is bounded between zero and the discount interest earned on the exercise price. (4) The early exercise premium of an American call option is bounded between zero and the present value of cash dividends to be paid before the option expiration.

What makes a call option go down?

The strike price is the price that a call buyer may purchase the shares at or before expiration. When the stock price is above the strike price, a call is considered in-the-money (ITM). So the first reason why your call option could be losing money is because the stock price is not above the strike price.

What is the lowest value a call option can have?

zero
The minimum value of an option is zero. This is because an option is only a choice, not an obligation. The value of an option cannot be negative, because you do not have to do anything to get rid of it. The option will always have a zero, or a positive value.

What’s the lower bound for a call option?

For an at-the-money option or an out-of-the-money option, the lower bound is zero. For example, for an out-of-the-money call option strike price (X) is higher than the spot price (X). So, if someone purchased this option, he will still be better off by buying the option from the spot market.

How to calculate the upper and lower bounds of options?

Then for European lower bound: c = S (0) + p – K*exp (-rT); but as p > 0, the call’s value must be at least as great as (setting p = 0 for its lower bound): c > S (0) + 0 – K*exp (-rT) –> c > S (0) – K*exp (-rT); i.e., stock price minus discounted strike

What is the minimum boundary value of an option?

Boundary conditions are used to estimate what an option may be priced at, but the actual price of the option may be higher or lower than what is set as the boundary condition. For all options contracts, the minimum boundary value is always zero, since options cannot be priced at negative money.

What’s the difference between a boundary condition and an option?

Boundary conditions are the maximum and minimum values used to indicate where the price of an option must lie. Boundary conditions are used to estimate what an option may be priced at, but the actual price of the option may be higher or lower than what is set as the boundary condition.