An investor who purchases a call option is:
A) highly leveraged for a gain but is limited in losses.
B) limited in his or her gain but is highly leveraged in losses.
C) highly leveraged for both gains and losses.
D) limited in both gains and losses.

Question

Quizplus · Accepted Answer

An investor who purchases a call option has the right, but not the obligation, to buy a specific underlying asset at a predetermined price (strike price) within a specific time frame. By purchasing a call option, the investor is highly leveraged for gain because the potential profit is unlimited since the underlying asset's price could potentially rise to infinity. However, the investor's losses are limited to the premium paid for the option. Therefore, choice A is the best answer.

An Investor Who Purchases a Call Option Is