Call Options on XYZ Corporation's Common Stock Trade in the Market

question 3

Multiple Choice

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?

• A) The price of these call options is likely to rise if XYZ's stock price rises.
• B) The higher the strike price on XYZ's options, the higher the option's price will be.
• C) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
• D) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.
• E) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.

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Definitions:

Gross Profit

The difference between revenue and the cost of goods sold before deducting operating expenses, interest, and taxes.

Cost of Merchandise Sold

The expense directly associated with producing goods that have been sold, including materials, labor, and overhead costs.

Purchase Discount

A reduction in price offered by a seller to a buyer for prompt payment or payment within a specified period.

Inventory Shrinkage

The loss of products between purchase from a supplier and sale to a customer, often due to theft, damage, or errors.