
Explanation:
A long call option with a strike price of $14 is the most suitable position for Kumar. This is because a long call option gives the buyer (in this case, Kumar) the right, but not the obligation, to buy the underlying asset (in this case, the stock of Geneva Computers Inc.) at the strike price before the option expires. If Kumar's prediction is correct and the stock price rises above $17, he can exercise his option to buy the stock at $14 and then sell it at the higher market price, making a profit. The payoff in this scenario would be the difference between the market price and the strike price, which is ($17 - $14). The profit would be this payoff minus the premium paid for the option, which is ($17 - $14 - premium paid). Therefore, this option position aligns with Kumar's investment strategy and market prediction.
Choice B is incorrect. A short call option would obligate Kumar to sell the stock at $17 if the option is exercised. This would not be beneficial for him if he anticipates that the stock price will rise above $17, as he would miss out on potential profits from selling at a higher market price.
Choice C is incorrect. A long put option gives the holder the right to sell a stock at a specified price within a certain period of time. Since Kumar expects the stock price to rise, not fall, this strategy does not align with his expectations and hence it's not suitable for him.
Choice D is incorrect. A short put option obligates Kumar to buy more of Geneva Computers Inc.'s stocks if they fall below $14, which contradicts his bullish outlook on the company's shares.
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Q-593. Kapil Kumar is an individual investor who invests a portion of his salary in stocks and derivatives at the beginning of every month. Kumar is interested in the stocks of Geneva Computers Inc., which are currently trading at the price of $14. However, he believes the stock will trade above $17 at the beginning of next month. If Kapil is interested in entering into an options contract that gives him the right to take exposure in the stock at $17, then suggest the most appropriate option position for Kumar.
A
A long call option with a strike price of $14.
B
A short call option with a strike price of $17.
C
A long put option with a strike price of $17.
D
A Short put option with a strike price of $14.