Question

Which of the following positions has an unlimited dollar risk?

A) Short 100 shares of ABC; long 1 ABC call.
B) Short 1 ABC Jan 50 put.
C) Short 1 ABC Jan 50 put; short 100 shares of ABC.
D) Short 1 ABC Jan 35 call; long 1 ABC Jan 40 call.

Answer 1

The position with short 1 ABC Jan 35 call and long 1 ABC Jan 40 call has unlimited dollar risk due to the short call option, as there is no limit to the potential rise in the stock price and hence the possible loss.

Step-by-step explanation:

The question relates to options trading, specifically the risk profile associated with holding certain positions. A position that consists of being short a call option (option D: Short 1 ABC Jan 35 call; long 1 ABC Jan 40 call) typically has unlimited dollar risk, because if the stock price rises significantly above the strike price of the short call, the option can be exercised by the buyer, and the seller (short position holder) has to provide the stock at the strike price.

Since there's no limit to how high a stock price can go, the potential loss is theoretically unlimited. Conversely, a long call option position has limited risk to the premium paid for buying the option.

In this specific case, while the long 1 ABC Jan 40 call would cap some of the risk by providing some offsetting gains if the stock price rises above 40, the unlimited risk from the short 35 call still remains as the primary factor. Thus, this position does have unlimited dollar risk due to the short 35 call component.