Question

Jillian owns a call option on WAN stock with a strike price of $20 a share. Currently, WAN is selling for $24.50 a share. Jillian would like to profit on this option but is not permitted to exercise the option for another two weeks. She believes the stock will decline in value before the two weeks is up. What should she do?

Multiple Choice

• Sell her option today

• Place an order to exercise her option on its expiration date

• Purchase an additional call option on WAN today with a strike price of $20

• Place an order to exercise her option as soon as she is permitted to do so

• Convert her American option into a European option

Jeff owns an American put option on 100 shares of ABC stock. The option has a strike price of $32.50 and a September expiration date. The stock has recently been declining in value, currently sells for $27.65 per share, and is expected to continue declining in value. Ignore all costs and taxes. If today is Wednesday, August 14, he:

Multiple Choice

• cannot exercise his option even though he would like to do so.

• should hold his option until September.

• can exercise his option and earn a profit.

• should exercise his option today and then sell the shares of stock on the September expiration date.

• should let his option expire unless the stock price increases above $32.50 a share.

Answer 1

Since Jillian owns a call option she is afraid of WAN stock price falling. Ideally In such expectation she should sell her option today but since she is not permitted to exercise the option for another two weeks she cannot sell it today.

Since Jillian is expecting that the stock will decline in value before the two week is up she should not wait till the option expiration date. If the expectation if for price to further drop after two weeks she should place an order to exercise her option as soon as she is permitted to do so.

Since the expectation is for share price to fall, she should not buy call option because the option value will decline in case of share price fall.

An American option can be sold prior to maturity but a European option can be sold only on its maturity rate. Since the expectation is stock price to fall, she should not wait till maturity. In such a case converting American option into a European option will not help as in that case option can only be exercised on maturity.

Option d is correct.
She should place an order to exercise her option as soon as she is permitted to do so.

Since Jeff is holding a American put option he can exercise his option even prior to maturity.
If Jeff exercises his option today he will earn a profit. However, Since the expectation is for prices to further fall he should hold the option and should not exercise the option today.
A put option is exercised when the stock price is less than the exercise price i.e when put is in the money. Since put is in the money at a price lower than 32.50 Jeff should not let his option expire as exercising will be profitable.

Option b is correct.
Jeff should hold his option until September.