Warnes Motors' stock is trading at $20 a share.Three-month call options with an exercise price of $20 have a price of $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 $2.
B) The price of the call option will increase by less than $2,but the percentage increase in price will be more than 10%.
C) The price of the call option will increase by less than $2,and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by more than $2.
E) The price of the call option will increase by more than $2,but the percentage increase in price will be less than 10%.

Question

Quizplus · Accepted Answer

The price of the call option will increase because the stock price has moved in favor of the call option holder (above the exercise price), but due to the option's delta (which measures the rate of change of the option price with respect to the stock price), the increase in the option's price will be less than the $2 increase in the stock price. However, given the leverage effect of options, the percentage increase in the option's price will be more than the 10% increase in the stock price.

Warnes Motors' Stock Is Trading at $20 a Share