The dollar change in the value of a stock call option is always
A) lower than the dollar change in the value of the stock.
B) higher than the dollar change in the value of the stock.
C) negatively correlated with the change in the value of the stock.
D) higher than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.
E) lower than the dollar change in the value of the stock and negatively correlated with the change in the value of the stock.

Question

Quizplus · Accepted Answer

The value of a stock call option is influenced by the price of the underlying stock, but due to the leverage effect of options, the percentage change in an option's value can be much higher than the percentage change in the stock's value. However, the dollar change in the value of a stock call option is not necessarily higher or lower than the dollar change in the stock itself; it depends on various factors including the option's delta. The statement that the dollar change in the value of a stock call option is always lower than the dollar change in the value of the stock is incorrect, making A the best choice given the options provided. However, it's important to note that this explanation clarifies the relationship between stock price changes and option value changes, and the original statement in A might be misleading without this context. Options can indeed experience significant leverage effects, meaning their percentage change can be much higher compared to the stock's change.

The Dollar Change in the Value of a Stock Call