Question

Select the letter for which the statement indicates either (1) a purpose of, (2) a reason for, or (3) a risk of this:

Speculation on a price increase in the underlying security.

options:

	call buying
	put buying
	uncovered call writer
	covered call writer

Select the letter for which the statement indicates either (1) a purpose of, (2) a reason for, or (3) a risk of this:

Risks loss of the entire premium if the price of the underlying security falls.

options:

	call buying
	put buying
	uncovered call writer
	covered call writer

Answer 1

=> Before moving into the answer i will give a basic idea about the options given.

* Call buying : It is the right to buy an underlying asset at a selected strike price.We have to pay a premium amount for the selected strike.For exmaple ABC stock is trading at $ 50 in the stock exchange and ABC stock's call option of stike price 55 is having a premium of $ 1.if the ABC stock price increases to $ 57, you can excercise the call option and buy the stock at $ 55 and sell it at the stock exchange and have a payoff of $ 2 per share and profit of $1 per share ( profit = payoff - premium paid), if the ABC stock is below $ 55 dollars, there is no use in excercising the option and and you will only lose the premium.We only gains if the underlying stock price increases in case of call option. Also in case of buying an call option, the maximum profit is unlimited and the maximum loss is limited to the premium paid.

* Put buying: It is the right to sell an underlying asset at a selected strike price.We have to pay a premium amount for the selected strike.For exmaple ABC stock is trading at $ 50 in the stock exchange and ABC stock's put option of stike price 45 is having a premium of $ 1.if the ABC stock price falls to $ 43, you can excercise the put option to sell the stock at $ 45 and have a payoff of $ 2 per share and profit of $1 per share ( profit = payoff - premium paid), if the ABC stock is above $ 45, there is no use in excercising the option and and you will only lose the premium.We only gains if the price falls in case of put option.Also in case of buying a put option , maximum loss is limited to the premium paid.

* Uncovered call writing: In uncovered call writing, we write the call option of a selected strike without owning the underlying asset so we can make profit if the price falls or not changes .For exmaple ABC stock is trading at $ 50 in the stock exchange and ABC stock's call option of stike price 50 is having a premium of 3 $ . By writing this call option, we can book a profit of $ 3 per share if the ABC stock price do not increase above $ 50. But we will start on getting lose if the price of underlying stock moved above the selected srike.The maximum profit is limted to the premium paid and maximum loss is unlimited.

*Covered call writing: Covered call writing is similar to uncovered call writing.Only difference is that we will have a long position in the underlying stock.

=> Now we can move to the answers of the question

1) Speculation on a price increase in the underlying security:

* The answer is call buying , it is the only case we can make gain if the the underlying price increases as we have discussed above.

2) Risks loss of the entire premium if the price of the underlying security falls:

* The answer is call buying, it is the only case we loss the entire premium if the underlying stock falls as we have discussed above.