Question

Consider the following statement related to writing a naked call option. For a given stock price, the ____________ the position is held, the more time value it loses and the ___________ the profit. Identify the correct words for these two blanks.​

	a.	​longer, higher
	b.	​longer, lower
	c.	​shorter, higher
	d.	​longer, flatter
	e.	​shorter, lower

Answer 1

Answer: Option a (longer, higher) is correct.

Writing a naked call option refers to selling a call option without owning the underlying asset. If the option premium decreases
the option writer makes profit.
Option premium=Intrinsic value + Time value
The longer the position is held the lesser will be the time value because time value decreases as the time to expiry approaches.
The more time the option loses, the option premium will also decrease.
The call option writer (seller) will make higher profit as the option premium decreases.

Hence, longer the position, the higher is the profit.