Assume you have the following 3 month options on XYZ available, where So=$52.00: Call, K=$50.00 Call, K=$52.00 Call, K=$54.00 Put, K=$50.00 Put, K=$52.00 Put, K=$54.00 You wish to create a directional exposure to XYZ. You believe that the current price will rise moderately over the next 3 months, to around$54.00. If the market falls, you wish to limit your losses. Using just two of the above call options, you can construct a strategy that will maximise your profit by buying a ? and ? a ?. Alternatively, using just two of the above put options, you can construct a strategy that will equally maximise your profit by buying a
Question
Assume you have the following 3 month options on XYZ available, where So=50.00 Call, K=54.00 Put, K=52.00 Put, K=54.00. If the market falls, you wish to limit your losses. Using just two of the above call options, you can construct a strategy that will maximise your profit by buying a ? and ? a ?. Alternatively, using just two of the above put options, you can construct a strategy that will equally maximise your profit by buying a
Solution
If you believe that the price of XYZ will rise moderately over the next 3 months to around $54.00 and you want to limit your losses if the market falls, you can use a bull call spread strategy. This strategy involves buying a call option and selling another call option with a higher strike price.
So, you can maximize your profit by buying a call option with a strike price of 54.00.
Alternatively, if you want to use put options to construct a strategy that will equally maximize your profit, you can use a bear put spread strategy. This strategy involves buying a put option and selling another put option with a lower strike price.
So, you can maximize your profit by buying a put option with a strike price of 52.00. This strategy would be profitable if the price of XYZ falls, contrary to your belief. However, it's mentioned here for completeness.
Similar Questions
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