The leverage strategy of buying call options is based on the idea that:
A)a small change in the price of the underlying common stock can cause a large change in the price of the option.
B)leverage reduces the risk of loss on the option contract.
C)leverage reduces the risk of loss on the portfolio.
D)None of the above

Question

Quizplus · Accepted Answer

Leverage is a very common reason for buying call options when the market is expected to rise during the exercise period. The use of calls in this way is similar to warrants discussed in Chapter 13, but calls have shorter lives. The call option is priced much lower than common stock, and the leverage is derived from a small percentage change in the price of the call option.

The Leverage Strategy of Buying Call Options Is Based on the Idea