It is May 19 and you own a June European call on ABC Corp. with an exercise price of $50. The option trades at $40 and ABC is trading at $86. What should you do?
A) Exercise the option now and take the profits.
B) Buy more options on ABC Corp.
C) Sell your ABC stock before its price declines.
D)Sit and wait until the June expiration.

Question

Quizplus · Accepted Answer

It is not advisable to exercise the option now as it is trading below its intrinsic value (current stock price minus exercise price). Buying more options would increase risk without any clear indication of higher returns. Selling the ABC stock now would not be wise if the price is expected to rise further. Therefore, the best option is to wait until the June expiration to see if the ABC stock price increases further, which may result in a higher option premium or enable to sell the option at a profit.

It Is May 19 and You Own a June European