Help in an exam?

Question

An investor purchased a stock at $50. When the stock dropped to $40 she initiated the repair strategy by purchasing the 40 calls and writing the 45 calls. With 3 weeks left until expiration the stock is now trading at $48 and the investor is now feeling quite bullish about the stock. Which of the following best describes her situation?


A. She could unwind her option position immediately, but would have to do so at a loss since the stock is above the short options? strike price.

B. She could unwind her option position immediately, and may be able to do so at a loss or at a profit, depending on the current price of the options.

C. If she maintains her position until expiration she will be able to unwind her option position for even money or for a credit as long as the stock is at $45 or lower.

D. None of the above.

E. Both B and C

Answer 1

B, unwind. Actually, as soon as one became the obvious winner and the other the obvious loser in a hedging spread, you step out of the losing side.

Answer 2

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