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

a.Negative

b. Insufficient data

c. Zero

d. Positive

Answer 1

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Answer:

Generally, Put option with lower exercise price has lower value and Put option with higher exercise price has higher value.

To write a put you receive put premium and to buy put you pay put premium.

As write put has lower exercise price i.e $80 and buy put has higher exercise price i.e $90. Thus, we you will receive less amount to write put and pay more to buy put.

Therefore, Your initial cost to set up position is Negative.