Chapter 06 · Section 6.1

Reducing Your Investment

We are in mid-January and you are long an April 35 call that you bought last week at 7 1/8. Unfortunately your predictions have not materialized yet: In fact the underlying shares have decreased to 30 1/2. You are now convinced that an increase to the previously anticipated level before the end of the month is unlikely.

CALLS Eastman Kodak strike Jan. Feb. Apr. bid - ask bid - ask bid - ask

30 9 1/4 - 9 3/4 8 7/8 - 9 1/4 9 5/8 - 10 1/8 35 5 3/4 - 6 1/8 4 7/8 - 5 1/4 5 1/8 - 5 1/2 40 3/8 - 1/2 1 1/4 - 1 3/8 1 7/8 - 2 1/8 45 1/16 - 1/4 1/8 - 1/4 7/16 - 1/2

In response you decide to sell an option which is out of the money in order to reduce your initial investment. Which, of the below choices, would permit you to do so?

a) Call 40 January
Yes. You think that the underlying will not rise before the end of the month and that the sale of a January 40 call for as little as 3/8 should give a good return compared to the others. Continue
b) Call 45 February
c) Call 40 April

(Click here for help)