the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.

Question

Quizplus · Accepted Answer

The statement is correct. When the stock price rises above the strike price, the call option becomes more valuable to the investor because they can exercise the option and immediately realize a capital gain by buying the stock at the strike price and selling it at the higher market price. Additionally, the likelihood of the option being exercised when it expires also increases, further increasing its value.

The Price of a Stock Rises Above the Strike Price