Value of call options contracts; Why would you pay more for a higher strike price?

Question

Why are some call options with a higher strike price more expensive than those with a lower strike price given they expire the same month?

One example; a call option with a strike of $10 costs $0.50 a share while a call option for the same stock with a strike of $7.50 costs $0.25. Why would the buyer of the call contracts pay more for a higher strike price?

Why wouldn't they just buy the cheaper contract with a lower strike price giving them a better chance of it expiring in the money??? Thanks

Answer 1

Nick is right. Check the bid ask prices to get a more accurate reading of the current price. Just split the difference between the bid and ask prices to get the approximate current price. Yahoo! has bid and ask prices for options.

Answer 2

I used to think the same thing.  If an option hasn't traded for a few days, its "last" price will seem like something completely random.  Once a trade goes through, it will seem like the option took off for no reason (it will show a change from last).

Your other answers are entirely accurate.  Look for the bid-ask to evaluate the cost of an option.  Bid is how much will be paid for a sell, and ask of course is how much you will need to pay for a buy.  Yahoo Finance does have this information.  Morningstar does as well, and their options chains are a bit better in my opinion.

Good luck.

Answer 3

Quoted prices change only when options are bought and sold, or when the options expire.  Perhaps the higher strike option wasn't traded for some time.  And its quoted price was something people paid sometime ago.  Whereas the lower strike option was traded more recently.  And its price was more up to date.