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.
You would like to buy the option at the lower exercise price for the best price possible. Since you are bullish, why don't you buy a call that is out of the money?
To "buy a call spread" is to purchase a call with a lower exercise price and to write a call with a higher exercise price. The investor will try to minimize the initial investment.
Response (b) is correct but there is some contradiction in your answer. The same option can not be both over and under valued!
Response (b) is correct but there is some contradiction in your answer. The same option can not be both over and under valued!
Response (b) is correct but there is some contradiction in your answer. The same option can not be both over and under valued!
You would like to buy the option with the lower exercise price for the best price possible. At expiration your profit will be equal to the difference bet ween the exercise prices minus the net premium paid.
Response (b) is correct, but since you are bullish why don't you buy a call that is out of the money?
Response (b) is correct but the other two are not.
Response (b) is correct, at expiration your profit is equal to the difference between the exercise prices minus the net premium paid.
At expiration your gain is equal to the difference between the exercise prices minus the net premium paid. The closer the ratio (difference between the exercise prices / net premium paid) is to one, the less profitable is the investment.