Your Aunt Agatha Purchased a Call Option a Few Months

question 93

Multiple Choice

Your Aunt Agatha purchased a call option a few months ago.Today is the expiration date,so she must decide whether to exercise the option.Which of the following statements is correct? Do not consider brokers' commissions in your answer.

• A) Aunt Agatha doesn't need to make a decision about exercising the option today;in fact,it would be better if she waited until after the option expires.
• B) Aunt Agatha should exercise the option if the price of the stock is less than the exercise,or strike,price.
• C) Aunt Agatha should exercise the option if the price of the stock is greater than the exercise,or strike,price.
• D) Aunt Agatha should exercise the option,regardless of the current stock price.
• E) None of the above.

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Definitions:

Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specific price within a specific time period.

Strike Price

The agreed-upon rate at which the possessor of an option may acquire (if it's a call option) or dispose of (if it's a put option) the underlying financial instrument or commodity.

Option

A financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at a specified price within a specified time.

American Call Option

A financial agreement granting the purchaser the option, yet not the compulsion, to purchase a stock, bond, commodity, or any asset at a predetermined price within a defined time frame.