Which of the following statements is CORRECT?
A) As the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
B) Issuing options provides companies with a low cost method of raising capital.
C) The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
D) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
E) An option's value is determined by its exercise value, which is the market price of the stock less its striking price.Thus, an option can't sell for more than its exercise value.

Question

Quizplus · Accepted Answer

The market value of an option is influenced by several factors, including the option's time to maturity and the volatility of the underlying asset's price. The time value portion of an option may decrease as its expiration date approaches, but the market value of an option also considers the stock's variability, or volatility. Options are often viewed as risky investments because their value can be affected by unexpected changes in the underlying stock's price.

Which of the Following Statements Is CORRECT