When the stock price increases with all else remaining the same, which of the following is true? A. Puts increase in value while calls decrease in value. B. Both calls and puts decrease in value. C. Calls increase in value while puts decrease in value. D. Both calls and puts increase in value.
Question
When the stock price increases with all else remaining the same, which of the following is true?
A. Puts increase in value while calls decrease in value.
B. Both calls and puts decrease in value.
C. Calls increase in value while puts decrease in value.
D. Both calls and puts increase in value.
Solution
The correct answer is:
C. Calls increase in value while puts decrease in value.
Here's the reasoning behind this choice:
A call option gives the holder the right to buy a stock at a certain price (the strike price) within a certain time period. When the stock price increases, the call option becomes more valuable because the holder can buy the stock at the lower strike price and then sell it at the higher market price.
A put option gives the holder the right to sell a stock at a certain price (the strike price) within a certain time period. When the stock price increases, the put option becomes less valuable because the holder would prefer to sell the stock at the higher market price rather than at the lower strike price.
So, when the stock price increases with all else remaining the same, calls increase in value while puts decrease in value.
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