Asked by Bruce Eugine on Jul 19, 2024
Verified
Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?
A) long call and short put
B) long call and long put
C) short call and short put
D) short call and long put
Stock Price Declines
A reduction in the market price of shares representing ownership in a company.
Long Call
An options trading strategy that involves buying call options with the anticipation that the underlying stock will rise in value.
Short Put
A type of options strategy where the investor sells put options, betting that the price of the underlying asset will rise above the strike price.
- Discuss the plethora of option trading strategies and their specific outcomes in terms of payoffs.
Verified Answer
VT
Vibhuti ThakurJul 24, 2024
Final Answer :
D
Explanation :
A short call and long put strategy involves selling a call option and buying a put option of the same underlying asset and expiration date. This strategy makes a profit when the stock price declines as the value of the put option increases, but loses money when the stock price increases as the value of the call option decreases. Therefore, D is the correct choice.
Learning Objectives
- Discuss the plethora of option trading strategies and their specific outcomes in terms of payoffs.