As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1)the immediate capital gain that can be realized by exercising the option and (2)the likely exercise value of the option when it expires have both increased.

Question

Quizplus · Accepted Answer

As the price of the underlying stock increases, the difference between the strike price and the market price also widens, which means that exercising the call option will result in a greater immediate capital gain. Additionally, the likelihood of the option reaching its exercise value by expiration also increases, further increasing its value. Therefore, both factors contribute to an increase in the value that investors are willing to pay for a call option as the price of the stock rises above the strike price.

As the Price of a Stock Rises Above the Strike