Option Characteristics

A

Let's break down Peter Ulrich's statements about call options and put options to determine whether he is correct or not.

Statement 1: "The maximum profit on a short call position is always less than the maximum profit on a long call position."

A short call position involves selling a call option without owning the underlying stock. The seller (writer) of the call option receives a premium upfront but has an obligation to sell the underlying stock if the option is exercised. The maximum profit for a short call position occurs when the price of the underlying stock decreases significantly, resulting in the option expiring worthless. In this case, the seller keeps the premium received. The maximum profit is limited to the premium received.

On the other hand, a long call position involves buying a call option. The buyer has the right but not the obligation to purchase the underlying stock at the strike price within a specific time frame. The maximum profit for a long call position is unlimited, as the buyer can benefit from a substantial increase in the stock price. The profit potential increases as the stock price rises above the strike price.

Based on these explanations, Ulrich's statement about the maximum profit on a short call position being less than the maximum profit on a long call position is correct. Therefore, Ulrich is correct regarding call options.

Statement 2: "A long at-the-money put option position will break even as soon as the price of the underlying stock decreases."

An at-the-money put option has a strike price that is equal to the current market price of the underlying stock. A long put position involves buying a put option, giving the buyer the right to sell the underlying stock at the strike price within a specific time frame. The buyer of a put option profits when the price of the underlying stock decreases below the strike price.

For a long at-the-money put option, the buyer pays a premium upfront to acquire the option. To break even, the stock price needs to decrease by an amount equal to the premium paid. Once the stock price falls below the break-even point, the long put position starts to generate a profit.

Based on this explanation, Ulrich's statement about a long at-the-money put option position breaking even as soon as the price of the underlying stock decreases is correct. Therefore, Ulrich is correct regarding put options.

In summary, Ulrich is correct regarding both call options and put options. The correct answer is C. Ulrich is correct regarding both call and put options.