Braddock Construction Co.'s 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 more than $2.
B) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
C) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
D) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
E) The price of the call option will increase by $2.

Question

Quizplus · Accepted Answer

The intrinsic value of the call option increases from $0 to $2 when the stock price rises from $20 to $22. The option price will increase by less than $2 due to time value, but the percentage increase will be more than 10% because the initial option price is $1.50.