Question

You believe that stock XYZ will go down substantially in value over the next 30 days. Which of the following options trading strategies could you use?

           

1. Buy a JAN 25 Call for $2.
2. Write a JAN 25 Call for $2.
3. Buy a JAN 25 Put for $2.
4. Write a JAN 25 Put for $2.

1. II and III only
2. I only
3. I and IV only
4. I, II, III and IV

Answer 1

If you believe that price is going down significantly then we have 2 options :

First one : buy put, so as price decreases, payoff increases, so profit increases

For put options : payoff = strike price - price on expiry

so if price decreases, payoff will increase and will give benefit

Second one : write a call, Here you will not have any loss if price goes down but profit will also be limited

If we write a call, premium received is our income and that is maximumbenefit.

If price goes down, call option will not be exercised and so payoff = 0 for a writer of a call.

so we have two options in which we can benefit if price is going down

Answer : A : II and III only. [Thumbs up please]