Eduardo owns an option that gives him the right to purchase shares of ABC stock at a price of $18 a share.Currently,the stock is selling for $21.60.He would like to profit on this stock but is not permitted to exercise his option for another 2 weeks.Contrary to other investors,he believes the stock price will decline significantly over the next 2 weeks.Given this situation,he should

Question

Quizplus · Accepted Answer

If Eduardo believes that the stock price will decline significantly over the next 2 weeks, then there is no point in waiting to exercise his option as he would be buying the stock at a higher price than its expected value. Instead, he should sell his option today to lock in his profit of $3.60 per share ($21.60 - $18) and avoid the risk of a decline in the stock price. Therefore, option A is the best choice.

Eduardo Owns an Option That Gives Him the Right to Purchase