Your Aunt Agatha purchased a call option a few months ago.Today is the expiration date,so she must decide whether to exercise the option.Which of the following statements is correct? Do not consider brokers' commissions in your answer.
A) Aunt Agatha doesn't need to make a decision about exercising the option today;in fact,it would be better if she waited until after the option expires.
B) Aunt Agatha should exercise the option if the price of the stock is less than the exercise,or strike,price.
C) Aunt Agatha should exercise the option if the price of the stock is greater than the exercise,or strike,price.
D) Aunt Agatha should exercise the option,regardless of the current stock price.
E) None of the above.

Question

Quizplus · Accepted Answer

Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price. This is because if the stock price is less than the exercise price, it is not profitable for her to exercise the option. However, if the stock price is greater than the exercise price, Aunt Agatha can purchase the stock at the exercise price and immediately sell it in the market at the higher price, making a profit. Waiting until after the option expires would not be beneficial as the option would expire worthless. Exercise of the option is not necessary if the stock price is less than the exercise price. Therefore, option C is correct.

Your Aunt Agatha Purchased a Call Option a Few Months