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 the volatility of the stock price. Which of the following correctly identifies the impact of these changes on the price of Tech Com call options?
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 price of call options 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 call options.

Tech Com Announces a Major Expansion into Internet Services