More optionality

What this option-pricing interview question tests

This is an easy option-theory question that probes understanding of a fundamental principle in derivatives pricing: the relationship between time value and option price. Interviewers use it to check whether you can reason about arbitrage-free bounds without needing to compute exact values.

The question rewards intuition about how optionality works. When all else is held constant, the only difference between two options is their time horizon. Candidates should be able to articulate how this difference constrains relative prices and why that constraint must hold in a market free of riskless profit opportunities. The reasoning is qualitative rather than computational.

• Time value and intrinsic value decomposition
• Monotonicity of option prices in time-to-expiry
• No-arbitrage principles in derivatives markets