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.
• d) the ratio between the investment and the difference of the exercise prices has to be close to 1.
  No. Given the fact that at expiration your profit is equal to the difference between the exercise prices minus the net premium paid, the more the ratio is close to one, the smaller the chances that your investment will result in a profit.

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