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

question 76

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 premiums 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:

Good Weather

Favorable meteorological conditions that positively influence activities, such as agriculture, outdoor events, and general mood.

Consumer Surplus

The discrepancy between the aggregate willingness to pay among consumers for a service or product and their actual payment.

Willingness to Pay

The maximum amount a consumer is ready to pay for a product or service, reflecting the value the consumer places on it.

Market Quantity

The total amount of goods or services that are available for purchase within a particular market.