Question

An investor is short 3 ABC July 50 call options and 3 ABC July 45 put options. Currently, ABC stock is selling for $47.50 and the investor has a small profit. The investor should consider closing the options position if ABC stock is likely to: (A) remain between $45 and $50 (B) be the target of a takeover bid (C) continue to exhibit low volatility (D) have unchanged earnings per share

Answer 1

B. Be the target of a takeover bid.

Step-by-step explanation:

It is gathered from analysis and in the cause of the risk management involved that it is likely to be the target of a takeover bid.

This investor has put on a Short Combination. The reason for a Short Combination would be the investor expecting the market price of the stock to remain neutral and expects to gain from the premiums received by selling both options. If the investor hears about a takeover bid, chances are that ABC's stock will fluctuate either above or below the 45 and 50 mark which would lead to a loss for the investor. Thus the reason that the investor would likely close both options positions upon hearing such rumors.