CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

If you write a put option to sell a stock at \$30 in 30 days, your option position is ______ and your exposure to the risk of the stock is ______.
A. long; short
B. short; long
C. short; short
Explanation: The put contract holder, on the contrary, has long exposure to the option contract and short exposure to the stock.

User Comment
CodyR The writing of a put contract is typically used to indicate the seller of the option.
SWhip I don't agree with this.

If you write the put then you will make money (from the premium) if the stock price is above \$30 as the buyer of the put will not sell you the stock for \$30 dollars when it costs more to buy it in the market. Therefore you get to keep your full premium if the stock price increases (a long position). You are exposed to the short side as if the stock price declines then you have to buy it at \$30 from the person you sold the put to, which would be much higher than the market value at that time.
SWhip Never mind. I misread "option position."
navarro I don't get this, please someone explain. Writing a put doesn't mean you think the stock is going to drop?
raywen8 Writer of put option expect stock to go up and pocket the premium when not exercised. When you write put option. Your option position is short(selling the put for premium) and your exposure is long(forced to buy) the stock should the stock price down(below X) and option exercised
Vazgen Writing a put at 30 means that you will have to BUY (not sell like the question says) the stock at that price expiration if price is < 30. I think the question is wrong
cowboy In this case, if the stock price drops, you lose money, and if the price rises, you win the premium. therefore you long the stock.

You write the option so you are shorting the option.

The question is correct.
111hal111 Your exposure to the risk of the stock is short because if the price drops, you pay up. You have no risk exposure to the stock going up since you've already collected the premium.
alexsar75 the question is wrong....you don't write a put option to sell a stock....that would be a call option or more like a forward contract. You buy a put option to sell at 30 and you would be short the option and long the underlying position. short side delivers asset, long side purchases.
alexsar75 correction..you write a put option to buy at 30...owner of option has a right to sell it to you at 30...you're still short the option and long the underlying. sorry. buying put to sell at 30 is long- option, short underlying.
littlecow alexsar75: I think you are totally lost here. get some sleep. lol
edrei7 The answer is A. It's intuitive. If you have a put option, you would want to sell when the price is lower, hence a short position.