If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.
Answer the following statement true (T) or false (F)
False
Rationale: For a stock price that is above the strike price, increasing the stock price causes the option price to get closer to the exercise value (i.e., the stock price minus the strike price) because the probability that the stock price will be out of the money expiration gets smaller. In other words, a high stock price relative to the strike price means that at expiration the option value is likely to equal the stock price minus the strike price. Therefore, the premium (which is the amount by which the option price exceeds the exercise value) gets smaller.
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