CFA CFA Level 1 Question about options and risk

Question about options and risk

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    • chen2196
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      Here is a question from reading 36: market organization and structure from the book Corporate Finance and Equity. So, can someone explain to me what is a long or short risk and why the exposure risk to

      long call and short put is both long? Thank you very much!

    • chen2196
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      The pictures of the questions I attached are all the way at the bottom if you are confused what I am asking about 🙂

    • Sophie Macon
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      Hi @chen2196 , this may be best explained with the options ‘hockey stick’ payoff charts:

      If you have a long call and a short put with the same strike price, underlying number of shares and expiration date, it is effectively a long stock position, i.e. you just bought the stock at strike price. Or visually, if you “add up” the payoff chart of the long call and short put, it can be shown as:

      Does this make sense?

    • chen2196
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      @Sophie thank you very much, that helps a lot!

    • rohan_patil
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      In the question it is mentioned following:

      Buy Call – This is Unlimited Profit on long side with limited loss on down sidePut Write – This has Limited Profit on long side but Unlimited loss on down side.

      As per the question it is asked that where is Robert’s risk Exposure. Accordning to the above situation it is certain that Robert shall have unlimited Risk on Down Side i.e if stock price will fall considerably then he will have unlimited risk. Means he shall exposed to unlimited risk on down side. However if stock price shall go up then he shall have unlimited profit.

      Question has asked that Robert’s exposure to the risk of the stock . It is tricky how to interpret question. According to me, question is asking that out of two open positions of Robert, which position shall give him maximum exposure to risk… either short put or long call.

      Short put shall give maximum loss means maximum exposure to risk.

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