Tech Com announces a major expansion into Internet services. This announcement causes the price of Tech Com stock to increase, but also causes an increase in price volatility of the stock. Which of the following correctly identifies the impact of these changes on the call option of Tech Com?
A) Both changes cause the price of the call option to decrease
B) Both changes cause the price of the call option to increase
C) The greater uncertainty will cause the price of the call option to decrease. The higher price of the stock will cause the price of the call option to increase
D) The greater uncertainty will cause the price of the call option to increase. The higher price of the stock will cause the price of the call option to decrease

Question

Quizplus · Accepted Answer

The increase in stock price raises the intrinsic value of the call option, and the increase in volatility raises the option's time value, both leading to an increase in the call option's price.

Tech Com Announces a Major Expansion into Internet Services