1. Which of the following positions would ordinarily minimize potential loss in terms of percentage of investment? Assume the loss would be realized during the term of the option.
A. Purchase a stock at $25.
B. Purchase a stock at $25 and a call on the stock for a $5 premium with a $21 strike price.
C. Purchase a call option for $4.
D. Purchase a stock at $25, and a put on the stock for a $5 premium with a $29 strike price.
2. The risk of shorting a stock is greater than the risk of buying a put because
A. the stock price can fall to zero, while the put limits risk to the amount of the premium.
B. a stock price change results in a relatively smaller change in an option on that stock.
C. the maximum risk of a put is the premium, while the maximum risk of shorting is unlimited because price can rise without limit.
D. options provide unlimited hedging opportunities that render option positions less risky than short stock positions.