Alternatively an increase in volatility will be

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Unformatted text preview: ime Decay: As each day passes the value of the option erodes (good). Most of the decay will occur in the final month before expiry. Profit B C 0 A Loss D Neutral 17 RATIO CALL SPREAD Construction: Buy 1 Call at A and Sell 2 Calls at B. Margins: Yes. Your Market Outlook: Neutral. The share price will expire around the strike price B. If you are wrong you see the risk as a price fall. The strategy provides protection if the share price falls as you will profit from the sold calls. If the stock rises strongly you will lose. Profit: The maximum profit is limited to B minus A minus net cost of position. Loss: The maximum loss is unlimited on the upside and limited to the net cost of the position on the downside. Volatility: Generally as volatility decreases this will benefit the position. Time Decay: It depends on the underlying share price, if it is below A, then time decay works against you on the bought option. If it is at B, then it works for you on the 2 sold options. Profit B 0 A Loss 18 RATIO P...
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This note was uploaded on 08/30/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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