Early exercise imposes a risk to all but one of the following transactions.
A)a short call
B)a short put
C)a protective put
D)an uncovered call
E)none of the above

Question

Quizplus · Accepted Answer

Early exercise is advantageous for the holder of an option but disadvantageous for the writer. A short call and an uncovered call are both risky transactions for the writer, as early exercise can cause the writer to lose money if they are forced to sell the underlying asset at a lower price than the market value. Similarly, a short put is risky for the writer, as early exercise can cause them to buy the underlying asset at a higher price than the market value. However, a protective put involves buying a put option as insurance against a possible price decrease in the underlying asset. If early exercise occurs, the writer of the put option is not at risk because the holder is simply selling the underlying asset at the agreed-upon strike price, which the writer is obligated to purchase. Therefore, the only transaction that is not at risk from early exercise is a protective put.

Early Exercise Imposes a Risk to All but One of the Following