Question

Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?
a. The price of the call option will increase by more than $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%.
e. The price of the call option will increase by $2.

Answer 1

Answer:

c. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%

The delta of an option is always less than 1 hence a $1 increase in underlying stock can never be equivalent or more than $1 similarly in this case a $2 rise can never have $2 or more than $2 increase in call option price, yes but the growth in option price can be more than 10%