Chapter 06 · Section 6.1

Invesment Quality

We can see that the call spread on Kodak 35 - 40 is not a wise investment. Beyond this what are the necessary requirements from the below list to constitute a strong investment?

a) the option with the lower exercise price is overvalued.
• b) the option with the lower exercise price is undervalued.
  Yes. You are buying an option at a low exercise price, you will therefore try to acquire it at the lowest price possible. As time passes the price of the option approches its theoretical value. Continue
  c) a strong probability of the underlying to increase above the higher exercise price.
  d) the ratio between the investment and the difference of the exercise prices has to be close to 1.

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