Question

An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices?

(i) - buy the stock and hold it for 60 days
(ii) - buy a put option
(ii) - sell (write) a call option
(iv) - buy a call option
(v) - sell (write) a put option
A. (i), (ii), and (iii)
B. (ii) (i), (ii), and (iv)
C. (i), (iv), and (v)
D. (ii) and (iii)

Answer 1

C. (i), (iv), and (v)

Step-by-step explanation:

(i) - buy the stock and hold it for 60 days

This step is quite natural since buying at lower price and selling at higher price will give profit .

(iv) - buy a call option

In option we do not buy stocks but we buy the right to buy a stock on a predetermined price . For it we give some price for it . It is called premium . As price of stock goes up the premium goes up . So the option premium acts as price of stock , though it does not involve much money . So it is a less investment option . By selling the option at higher premium we can earn income .

v ) An option seller receives money from the buyer in the beginning . So when price rises , the option will not be exercised by the buyer so the seller receives money and earns income as option premium .