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changes in market value of a call option on a common stock

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Option: Which of the following events are likely to increase the market value of a call option on a common stock? Explain.
a. An increase in the stock's price.
b. An increase in the volatility of the stock price.
c. An increase in the risk-free rate.
d. A decrease in the time until the option expires.

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Solution Summary

This post explains which events will have an impact on the market value of a call option on a common stock and how.

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a. An increase in the stock's price.
It will increase the market value of the call options. The payoff from a call option is the higher of (amount by which the stock price exceeds the strike price or zero). Therefore, as the stock price goes up, the value of the call option goes up.

b. An increase ...

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