Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

a. The price of the call option will increase by more than $2.

b. The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.

c. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.

d. The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.

e. The price of the call option will increase by $2.

Question

Business

Adalynn Mcgrath

29 April, 19:46

Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

a. The price of the call option will increase by more than $2.

b. The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.

c. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.

d. The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.

e. The price of the call option will increase by $2.

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Answers (1)

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Ivy Herman · Answer 1

c. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%

The delta of an option is always less than 1 hence a $1 increase in underlying stock can never be equivalent or more than $1 similarly in this case a $2 rise can never have $2 or more than $2 increase in call option price, yes but the growth in option price can be more than 10%