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? Compare the different prices according to your expectations of the market, considering also the different possibilities of market evolution that could occur in the future.