The Leverage Strategy of Buying Call Options Is Based on the Idea

question 72

Multiple Choice

The leverage strategy of buying call options is based on the idea that:

• A)a small change in the price of the underlying common stock can cause a large change in the price of the option.
• B)leverage reduces the risk of loss on the option contract.
• C)leverage reduces the risk of loss on the portfolio.
• D)None of the above

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Definitions:

Maximum Capacity

The highest level of output or activity that a facility, system, or machine can achieve under normal conditions.

Capital

Economic resources that are used in the production of goods and services, including buildings, machinery, equipment, and financial assets.

User Cost

The cost of using a durable good over time, considering depreciation and the opportunity cost of not investing funds elsewhere.

Economic Depreciation

A measure of the decrease in value of an asset over time due to use, wear and tear, and obsolescence.