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

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%.

Quizplus · Accepted Answer

The call option's price will increase by less than $2 because options have time value and other factors affecting their price. However, the percentage increase in the option's price will be more than 10% due to the leverage effect of options.

Warner Motors’ Stock Is Trading at $20 a Share