Question

Consider the following portfolio. You write a put option with exercise price $80 and buy a put with the same expiration date with exercise price $95. Your initial cost to set up the position is

		Zero
		Positive
		Negative
		Insufficient data

Answer 1

Consider the following portfolio. You write a put option with exercise price $80 and buy a put with the same expiration date with exercise price $95. Your initial cost to set up the position is

Answer : Negative (cash outflow)

If all other factor remans constant then the put option price for 95 strike of put option would be higher than the the putt option with strike of 80, Hence initial cost to set up this position would be negative that means net cash flow would be negative.