Question

Let C be the price of a call option to purchase a security whose present price is S. Explain why C is less than or equal to S.

I'm just thinking it wouldn't make financial sense to pay more for the call option than the present price of the security. I'm not sure if there is more of an explanation that is needed. I was also wondering is there any time when it would be favorable to pay more for the call option than the present price of the security?

Step 1

Options are derivative contracts and the amount that we pay to buy an option is called premium.

Step 2

When we buy or sell options, we enter into the contracts and pay only the premium.

Step 3

Here, we are not buying the underlying security. So, option premium...

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Sorry about that. What wasn’t helpful?