Question

1. The profit for a short position in a call option is always negative or zero. (a) True (b) False

Answer 1

TRUE. call option means a person agreed to buy an underlying asset on a future date for a fixed price named as strike price. The stock price may fluctuate according to the market situations. when the stock is selling below the strike price (agreed price) then he may get minimal profit or loss only, but when the stock is selling at a good price in the market, then also he need to sell the stock at agreed price. There he may suffer huge loss.Short position call option can make profit out of falling market, at the same time it is having high risk because it is not possible to fall the price of an underlying asset in a short span of time. it will be better to invest in a long term put option.