Question

Logan has the following position in his account.

Logan is long 1 DEF May 35 call. He anticipates a slight bullish move in DEF from which he wants to benefit, but he also wants some income generated to reduce the cost of the position without adding additional risk. He could accomplish this by adding which of the following positions to his account?

A Short 1 DEF May 45 call
B Short 1 DEF May 25 call
C Short 1 DEF May 45 put
D Short 1 DEF May 25 put

Answer 1

Logan can add a covered call strategy to his position by shorting a DEF May 45 call, which would generate income without adding significant risk, thereby creating a bull call spread. the best choice is option A.

Step-by-step explanation:

Logan is long 1 DEF May 35 call and seeks to benefit from a slight bullish move in DEF while also generating income to reduce the cost of the position without adding additional risk. He can accomplish this by creating a covered call strategy. This involves selling a call option at a higher strike price than the owned call. By doing so, Logan receives the option premium as income, which can offset the cost of the long position to some extent.

To add a position that meets these requirements, the best choice is option A, which is to short 1 DEF May 45 call. By selling this call, Logan would collect the premium and also not add significant risk to his position because the short call is covered by the long call he already owns. This is known as a bull call spread or a call credit spread.