Which is correct regarding call option elasticity? It measures percentage change in the option price per...

Which is correct regarding call option elasticity?

It measures percentage change in the option price per 1% change int he stock price
		It is positive
		It is higher than one
		All of the above

Solutions

Expert Solution

The correct answer is all of the above.

---> Call option elasticity measures percentage change in the option price per 1% change int he stock price.

When there is change in stock price, the price of call option also changes. The percentage change in the option price per 1% change int he stock price is call option elasticity.

---> As there is positive relation between stock price and the call option price, its elasticity will be positive.

Call option is right to buy. The seller of the call option has a obligation to sell the security if the right is exercised at maturity. Suppose current stock price is 30 $. Strike price is 28 $ . Call option price is $1.

(Strike price is the price at which the stock can be purchased on maturity if the current price at that time is greater than the strike price).

Now suppose stock price increases to 32 $, with the increase in stock price the call option price will increase for strike rate $28. As with increase in stock price it will become more riskier for the seller of the call option.

Therefore there is positive relation between stock price and the call option price.

--> The elasticity is higher than 1. The percentage change in option price will be greater than stock price as the option position is riskier than the underlying asset.

Hope it helps!

jeff jeffy answered 1 year ago

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