Assume That You Own Both a May 40 Put and a May

question 403

Multiple Choice

Assume that you own both a May 40 put and a May 40 call on ABC stock. Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.

• A) An increase in the stock price will increase the value of your put and decrease the value of your call.
• B) Both a May 45 put and a May 45 call will have higher values than your May 40 options.
• C) The time premium on both your put and call are less than the time premiums on equivalent June options.
• D) A decrease in the stock price will decrease the value of both of your options.
• E) You cannot profit on your position as your profits on one option will be offset by losses on the other option.

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Definitions:

Accrued Salaries

Salaries that have been incurred but not yet paid, representing an expense for the company and a liability until the payment is made.

Periodic Inventory System

An inventory accounting system where inventory levels and cost of goods sold are determined at the end of an accounting period through physical counts.

Merchandise

Goods that are bought and sold in the course of business, typically in a retail or wholesale setting.

Note Payable

A written promissory note in which the borrower agrees to pay back the lender a certain amount of money at a future date or on demand.