Question

Describe the effect on a call option’s price that results from an increase in each of the following factors:

• (1)

  stock price,

• (2)

  strike price,

• (3)

  time to expiration,

• (4)

  risk-free rate, and

• (5)

  standard deviation of stock return.

Answer 1

(1)
stock price: Call option price increases with increase in stock price as it becomes more favorable to exercise the option

(2)
strike price: Call option price decreases with increase in strike price as it becomes less favorable to exercise the option

(3)
time to expiration: Call option price increases with increase in time to expiration as time value and thus chance of being exercised increases

(4)
risk-free rate: Call option price may increase or decrease with increase in risk free rate but generally increases

(5)
standard deviation of stock return: Call option price increases with increase in standard deviation of stock return as chance to get exercised increases