An American Call option expiring 6 months from now on a certain stock has a strike price of $100 and the premium paid for the call was $15

Finance Dec 10, 2020

An American Call option expiring 6 months from now on a certain stock has a strike price of $100 and the premium paid for the call was $15. Today, the stock price rose to $120 per share. Please mark the only incorrect statement about the call option.

a. It is always better for the holder of a call to exercise it as soon as it is in the money

b. Although the call is in the money, it may be more valuable for the investor not to exercise the call early

c. If the investor were to exercise the call today, its profit would amount to $5

d. If the investor were to exercise the call today, its holding period return would be 33.3%

Expert Solution

All the options are correct except option c, as exercising the option as soon as it is in the money will limit the profits. It might be more valueable to hold the option for long.

Option a is correct as it is not true.

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