Tele-Tech Com announces a major expansion into internet services. This announcement causes the price of Tele-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 Tele-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.
E) The greater uncertainty has no direct effect on the price of the call option. The higher price of the stock will cause the price of the call option to decrease.

Question

Quizplus · Accepted Answer

The price of a call option increases with the underlying stock price and also increases with volatility. The announcement leads to both a higher stock price and greater volatility, both of which contribute to an increase in the price of the call option.

Tele-Tech Com Announces a Major Expansion into Internet Services