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.
• c) a strong probability of the underlying to increase above the higher exercise price.
  No. In this case you proceeded to buy the option out of the money, which permits you to benefit from the high leverage.
  d) the ratio between the investment and the difference of the exercise prices has to be close to 1.

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