Question

The maximum possible gain of a long position in call option is __________, and the maximum possible gain of a short position in put option is __________.

Multiple Choice

A) stock price - exercise price, unlimited

B) exercise price - stock price, premium

C) unlimited, exercise price - stock price

D) unlimited, premium

Answer 1

Answer

D) Unlimited, premium

Explanations

The maximum possible gain of a long position in call option is Unlimited

Call option gives the holder a right to purchase the underlying asset at an agreed strike price or exercise price on maturity date and writer of call option has an obligation to sell the underlying asset at an agreed strike price or exercise price on maturity date, if the call option holder exercise his right. Call option is exercised when market price is more than strike price.

Since this is a long position in call option, that means we are call holder and we will exercise the option only when market price is higher than strike price.

Market price may be any amount, so maximum possible gain for long position in call option is Unlimited.

Maximum possible gain of a short position in put option is premium

Put Option gives the holder a right to sell the underlying asset at agreed strike price or exercise price on maturity date and the writer of put option has obligation to buy the underlying asset at agreed strike price or exercise price on maturity date if the holder exercises his right.

For getting the right, the holder pays the writer a premium as consideration.

Since this is a short position that means we are put writer, so maximum gain will be the premium received at the time of taking a short position on put option.