If the Market Is in Equilibrium, Then an Option Must

question 18

True/False

If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock's current price and the option's strike price.

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Definitions:

Margin of Safety

The difference between actual sales and the break-even point, used to assess the risk of loss from declining sales.

Fixed Costs

Costs that do not vary with the volume of production or sales, such as rent, salaries, and insurance premiums.

Variable Costs

Expenses that change in proportion to the amount of goods produced or the volume of sales, including labor and materials.

Operating Leverage

Operating leverage is a measure of how revenue growth translates into growth in operating income, highlighting the scalability of a company’s business model.