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Basic Question 4 of 18
If you exercise a put option prior to expiration ______
B. you must have been the writer of the option when it was created.
C. you will receive less than you would if you let the option run to maturity.
D. you have behaved in a rational manner if the market price exceeds the strike price.
E. you must own a European option.
A. you are obligated to sell the asset underlying the option contract at the option strike price.
B. you must have been the writer of the option when it was created.
C. you will receive less than you would if you let the option run to maturity.
D. you have behaved in a rational manner if the market price exceeds the strike price.
E. you must own a European option.
User Contributed Comments 11
| User | Comment |
|---|---|
| Iyal | Obligated? not have a right to sell at strike price? explanation please anyone |
| examinee | Once u have exercised the option then u are obligated. U have the option only till u have not exercised. |
| stefdunk | an option becomes an obligation when exercised |
| dhiru | I seem to vaguely remember having read an hypothesis that : it is always advantageous to hold an option to maturity as opposed to exercising it earlier for the loss of opportunity costs (can't seem to recollect the exact specifics) but answer C, closely sums it up. Any thoughts of what I might have confused myself with ?. |
| tanyak | Dhiru - I think that has to do with the price of an European call option relative to an American call option...if you exercise an American option prior to maturity, you are losing out on the opportunity cost to earn cash payments on the underlying and also because the lower bound of a European call incorporates the extra gain because of time value of the European option. |
| omer123 | Plus you can't exercise a Euro Option before Maturity. |
| bobert | Dhiru, you are correct in what you remember. An American and European Put will have basically the same price until expiration due to the opportunity cost of selling. The key word in C is that it WILL. This is not necessarily true. There are a few instances where it is beneficial to exercise an American put rather than hold till expiration. I am a little foggy on the specifics, but I believe it has something to do with the cash flow of the stock for one thing, such as dividends. I cannot recall another circumstance, but I feel as if there is one. |
| StanleyMo | For put option you have the obligation to sell the asset if the buyer exercise the buy option. |
| tschorsch | It is almost always advantageous to sell the option as opposed to exercising it before maturity since the price of the option will always include some non-intrinsic value. An American option must be worth more than the profit made on the execution because there is the chance that it will be worth even more later. If the option is far enough in the money, it will move very closely with the underlying and the difference may be less than the transaction costs. |
| ankurwa10 | option D seems to describe someone with a self destruct button, doesn't it? Why sell when the market price is higher. Why choose to exercise an option sell when you clearly would have got a higher price in the market. Am i missing something? |
| GBolt93 | tschorsch gave the correct answer to dhiru's question. It's a matter or selling instead of exercising not holding to maturity instead of exercising. |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
determine the value at expiration and profit from a long or a short position in a call or put option
contrast forward commitments with contingent claims
CFA® 2024 Level I Curriculum, Volume 5, Module 2.