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?

c) Call 40 April
No. Even if you sell an April 40 call at $ 2 1/8 (which is not very likely) you obtain a spread which costs you $5 and has absolutely no potential gain. (40 - 35) - 5 = 0.

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