Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
A) The higher the strike price on XYZ's options, the higher the option's price will be.
B) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
C) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.
D) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
E) The price of these call options is likely to rise if XYZ's stock price rises.

Question

Quizplus · Accepted Answer

The price of call options is generally positively correlated with the price of the underlying stock. As such, if XYZ's stock price increases, the price of its call options is also likely to increase. None of the other options hold true. A higher strike price actually results in a lower option price (A), a longer expiration date generally leads to a higher option price (B), and a decrease in stock price volatility typically results in a decrease in option price (C). Option holders do receive dividends (D), but the option price is adjusted for the amount of the dividend.

Which of the Following Statements Is Most Correct, Holding Other