I realize this is easy once it clicks but I’m stuck, mind breaking this one down?
Thanks in advance.
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I can try to take a swing at this one.
100 shares short at $94.25. Since all the prices mentioned are below 94.25, the short position will make money.
94.25 - 87.25 = 7 7(100) = $700 profit
94.25 - 89.25 = 5 5(100) = $500 profit
94.25 - 89.00 = 5.25 5.25(100) = $525 profit
94.25 - 91.25 = 3 3(100) = $300 profit
However to hedge, the investor purchased a call at $4. All long calls or puts are purchased for a debit. In this case it’s -$400
If you subtracted $400 from any of the numbers above, the only one that would be negative is the last one, $91.25.
300-400 = -100
Investor lost $100 on the trade.
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That’s a great breakdown, @Gray.
Here’s a quick shortcut that may save some time. If you can identify the “dominant side” of a strategy like this, you can find the answer quickly. Whenever stock is paired with an option, the stock will always be the dominant side of the strategy. Therefore, the short stock position is our focus.
Next, identify the market sentiment of the dominant side. Short stock is bearish.
The question is basically asking which price will result in a loss. Given our dominant side is bearish, we’re going to obtain a loss in the answer with the highest market price.
No math required, and this will work every time!
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Both great takes on this question, thank you.
Identifying what these questions are really asking is the toughest thing for me right now.
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It will help you if you have a dump sheet on options.
it was difficult for me to think in my head.
but when I see “long call” in the question like in your screenshot, when the investor is trying to short the shares. He is bearish. but the remainder of the question is a long call being bullish.
If you have a dump sheet, it might help identify and help you understand the concept.
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