Warner Motors' stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.What will happen if the stock price increases 10%,to $22 a share?

A) The price of the call option will increase by $2.
B) The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
C) The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
D) The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.

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Gabby Revell · Accepted Answer

Final Answer : C, Explanation :  The price of the call option will increase by less than $2 because the intrinsic value of the option (the difference between the stock price and the strike price) increases by $2, but the time value of the option may decrease as it gets closer to expiration. However, given the leverage effect of options, the percentage increase in the price of the call option will be more than the 10% increase in the stock price.

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