You own a call option on ABC stock. The exercise price is $25 and the current stock price is $23. The option payoff will _________ if the stock price increases by $5 and the payoff will _________ if the stock price decreases by $5.
A) Increase; decrease
B) Increase; remain the same
C) Remain the same; increase
D) Remain the same; decrease
E) Decrease; remain the same

Question

Quizplus · Accepted Answer

A call option payoff increases when the stock price exceeds the exercise price. If the stock price increases by $5, it becomes $28, which is above the exercise price of $25, resulting in a positive payoff. If the stock price decreases by $5, it becomes $18, which is still below the exercise price, so the payoff remains the same at zero.

You Own a Call Option on ABC Stock