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Answers to End-of-Chapter Questions Q15-2. Is buying an option more or less risky than buying the underlying stock? A15-2. The option is more risky than the underlying stock if the absolute dollar amounts invested in each is equal. With options, there is a very significant chance that the investor will lose 100% of the money invested. There is also a very good chance of a very high positive return. The likelihood of such extreme returns on stocks is very low. For example, investors can use options to enter a desired stock position over a period of time with less risk than the common stock today. i.e. Suppose a company has pending litigation, which should be settled within the next year. The stock currently trades at \$100 and the investor wants to own 10,000 shares, but doesn’t want the risk of a possible negative outcome with the litigation. The investor could buy 100 calls (100 shares per contract × 100 calls = option to buy 10,000 shares) with a strike of \$100 for \$2.50 with a year till expiration. Now the investor is only putting up \$25,000 (the stock could go to \$0 and the investor would only lose the \$25,000) purchase the option to buy 10,000 shares @ \$100. If the investor bought the stock he\she would have to put up 10,000 × \$100 = \$1 million in capital. In this situation the options are less risky than the stock. Say the litigation was favorable the and the stock went to \$115 within the year then the investor would make \$12.50 per share (giving up \$2.50 in option premium). If the litigation was negative and the stock price went to \$85 the investor would only lose the \$2.50/share (option premium) instead of \$15/share

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