Question

You have taken a stock option position and, if the stock's price drops, you will get a level gain no matter how far prices fall, but you could go bankrupt if the stock's price rises. You have________________________________. Multiple Choice

bought a call option.

bought a put option.

written a call option.

written a put option.

written a straddle.

Answer 1

In case of written a call option the profit is computed as follows:

= (Strike price - Price at expiration + Premium received)

In the above equation as can be seen the profit will rise if the price of the stock falls. But the maximum profit in case of writing a call option is limited to the amount of premium received. However if the price will rise, then it will lead to loss and the loss will increase as much as the price will rise since the maximum loss in case of writing a call option is not limited.

So, the correct answer is option of written a call option

The option of bought a call option and bought a put option are incorrect since both of them have losses limited to the amount of premium.

The option of written a put option is incorrect since under this option the profit increases when the stock prices goes up and not when the stock prices goes down.

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