If the stock market declines,
1) the owner of a stock index call option profits
2) the owner of a stock index call option loses
3) the writer of a stock index call option profits
4) the writer of a stock index call option loses
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question

If the stock market declines,​
1) the owner of a stock index call option profits
2) the owner of a stock index call option loses
3) the writer of a stock index call option profits
4) the writer of a stock index call option loses
A)1 and 3​
B)​1 and 4
C)​2 and 3
D)​2 and 4

Quizplus · Accepted Answer

2 and 3. When the stock market declines, the value of a call option (which gives the holder the right to buy the index at a predetermined price) decreases, leading to a loss for the owner of the call option. Conversely, the writer (seller) of the call option, who has an obligation to sell the index at the strike price if the option is exercised, profits because the likelihood of the option being exercised decreases, allowing them to keep the premium paid by the buyer with less risk of having to sell the index at an unfavorable price.

If the Stock Market Declines,​

If the Stock Market Declines,