Which of the following statements is CORRECT?
A) Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.
B) Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.
C) Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E) If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

Question

Quizplus · Accepted Answer

Call options often sell for more than their intrinsic value (exercise value minus stock price) due to time value, but the relationship between exercise value and premium isn't as direct as A or B suggest. The put-call parity does not imply that puts and calls on the same stock have the same price, as D suggests, because they have different rights and obligations. Exercising a call option early to capture an immediate profit ignores the potential additional value of time and volatility that could increase the option's value beyond the immediate exercise profit, which is why E is correct.

Which of the Following Statements Is CORRECT