Explain how an aggressive bear spread can be created using put options.

An aggressive bull spread using call options is discussed in the text. Both of the options used have relatively high strike prices. Similarly, an aggressive bear spread can be created using put options. Both of the options should be out of the money (that is, they should have relatively low strike prices). The spread then costs very little to set up because both of the puts are worth close to zero. In most circumstances the spread will provide zero payoff. However, there is a small chance that the stock price will fall fast so that on expiration both options will be in the money. The spread then provides a payoff equal to the difference between the two strike prices, .

Leave a Reply

Your email address will not be published. Required fields are marked *


x

Related Posts

Evaluation of Transfer Pricing Policies
Introduction When one department of company manufactures some product which is supplied to another department of the company, transfer pricing i...
What is financial reconstructing
When a company cannot pay its cash obligations - for example, when it cannot meet its bonds payment or its payments to other creditors it goes ba...
Coffee Maker's Incorporated (CMI) - Transfer Pricing Example
Coffee Maker's Incorporated (CMI)Two divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Par...
powered by RelatedPosts