Question

The value of a call option on a non-dividend paying stock is lower when _______________.

I. the exercise price is higher
II. the contract approaches maturity
III. the stock decreases in value
IV. a stock split occurs

Answer 1

Here, three answers are possible

Answer : I, II and III

As we are buyer of call option, we will have higher profit if stock price increases or our exercise price is lower

Here it is asked when it is lower, so answer is exactly opposite of what we wrote in first line. When exercise price is higher and stock price is lower, the call option will have lower value.

Lastly as we approach maturity or expiry, value of call option approaches to zero.

split practically keeps call price same only that no of shares get doubled and price got half.

Answers : I, II, III