Tele-Tech Com has announced a large loss in their on-line services division causing the price of Tele-Tech Com stock to drop but the price volatility of the stock is not expected to drop. Which of the following correctly identifies the impact of these changes on the call option of Tele-Tech Com?
A) Both changes cause the price of the call option to decrease.
B) Both changes cause the price of the call option to increase.
C) The volatility normally will have a negative effect on the price of the call option while the lower price of the stock will cause the price of the call option to increase.
D) The volatility normally will have a positive effect on the price of the call option while the lower price of the stock will cause the price of the call option to decrease.
E) Volatility has no direct effect on the price of the call option while the lower price of the stock will cause the price of the call option to decrease.

Question

Quizplus · Accepted Answer

Increased volatility generally increases the value of options because it implies a greater probability of the stock price moving in a favorable direction for the option holder. However, a decrease in the stock price reduces the value of call options, as their value is derived from the potential for the stock to rise above the strike price.

Tele-Tech Com Has Announced a Large Loss in Their On-Line