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Unformatted text preview: 1 Buying Index Calls To Participate In Market Ad- vances (naked call) Profit & loss characteristics: Profit potential will be theoretically unlimited. The loss potential is limited to the premium paid for the call. Break-even point: The break-even point is an index level equal to the strike price of the call plus the premium paid for the call. An index level higher than that will be profitable, while a lower level will be unprofitable. 2 Buying Index Puts In Anticipation Of A Market Correction (naked put) Profit & loss characteristics: The maximum loss on a purchased index put will be limited to the premium paid for the option. This strategy does present the investor with the potential for large but limited gains, should his/her forecast of the market direction be correct. The maximum gain would occur if the index fell to a value of zero and would equal the strike price less the premium paid for the option. Break-even point: The break-even point is an index level equal to the strike price of the put minus the premium paid for the put options. A higher index level will result in losses, while a lower index level will show profits.losses, while a lower index level will show profits....
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This note was uploaded on 05/10/2008 for the course FIN 367 taught by Professor Han during the Spring '08 term at University of Texas at Austin.
- Spring '08