Circular File Stock Is Selling for $25 a Share

question 53

Essay

Circular File stock is selling for $25 a share. You see that call options on the stock with an exercise price of $20 are selling at $3. What should you do? What will happen to the option price as investors identify this opportunity? Then you observe that put options on Circular File with an exercise price $30 are selling for $4. What should you do?

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Definitions:

Insight

The ability to understand the inner nature of things or a deep understanding of a person or situation, often leading to a sudden clear solution after a period of confusion.

Learning Set

The ability to become more efficient in learning new tasks based on experiences gained from learning previous tasks.

Response Set

A tendency for a person to respond to questions or situations in a patterned way, often based on habit or bias rather than thoughtful consideration.

Operant Conditioning

A method of learning that occurs through rewards and punishments for behavior, emphasizing the effect of consequences on future behavior.