Identify the correct statement related to the choice of exercise price for buying a call.
A)the higher the exercise price the higher the call premium
B)the lower the exercise price the more likely the call option will expire out-of-the-money
C)A higher strike price results in smaller gains on the upside but smaller losses on the downside
D)the higher the exercise price the more dividends contribute to the overall profit
E)none of the above are correct statements related to the choice of exercise price for buying a call

Question

Quizplus · Accepted Answer

A higher exercise price for a call option results in smaller gains on the upside but also smaller losses on the downside. This means that the option holder is taking on less risk for potentially smaller returns. The other statements are incorrect - the premium is affected by various factors, not just exercise price; a lower exercise price increases the likelihood of in-the-money expiration; dividends do not necessarily contribute to profit from a call option.

Identify the Correct Statement Related to the Choice of Exercise