Chapter4 - Chapter Four Option Combinations and Spreads...

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Chapter Four Option Combinations and Spreads Answers to Problems and Questions 1. A straddle involves a higher maximum profit if the stock remains near the option striking price. A strangle has a lower maximum profit, but it occurs over a wider range of prices. 2. A hedge wrapper has three positions (long stock, short call, long put) while a spread has only two (long one option and short another of the same type). 3. A position that is long 100 shares of stock and short two call contracts has a profit and loss diagram similar to a short straddle. 4. There is no obvious significant to this point. There will always be such a common point because the third line is an “average” of the other two. It will intersect at the average of the two striking prices. 5. The quotation is a cousin of the “don’t put all your eggs in one basket” proverb. 6. Many speculators follow this practice, but it is not appropriate to say that a spreader should always do this.
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This note was uploaded on 01/31/2011 for the course ACCT 331 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter4 - Chapter Four Option Combinations and Spreads...

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