Warner Motors' stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%, to $22 a share?
A)The price of the call option will increase by $2.
B)The price of the call option will increase by more than $2.
C)The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
D)The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
E)The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.

Question

Quizplus · Accepted Answer

The call option's intrinsic value increases as the stock price rises, but the increase in the option's price is typically less than the increase in the stock price. However, because the option is relatively cheap, the percentage increase in the option's price can be more than the percentage increase in the stock price.

Warner Motors' Stock Is Trading at $20 a Share