It is May and you own a June call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?
A) Exercise the option now and take the profits.
B) Buy the stock of ABC Corp because option traders seem to be optimistic about its prospects.
C) Sell your ABC stock before its price declines.
D) Sit and wait until the June expiration.

Question

Quizplus · Accepted Answer

Since the option still has one month until expiration and is currently trading at a premium of $40, it is likely that the price of the option will continue to increase as the stock price of ABC Corp. increases. Therefore, it may be more profitable to wait until closer to the expiration date before deciding whether to exercise the option or sell it. Buying the stock or selling the stock are not appropriate actions to take based solely on the option's price.

It Is May and You Own a June Call on ABC