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?

b) Call 45 February
No. You forsee that the underlying stock will not increase before the end of the month, why don't you sell a call which will profit more? You could even sell the February 45 call in the months to come at a price higher than its present value.
c) Call 40 April

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