Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? (hint：draw graphs and combine them) A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

Question

Business

Inchworm

19 January, 07:47

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? (hint：draw graphs and combine them) A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

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Answers (1)

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Martha Strickland · Answer 1

Option D is correct option.

Short call and long put

Explanation:

Short call and long put = - max (S - K, 0) + max (K - S, 0);

As S declines, the payoff from long put position improves. As S increases, payoff from short call position loses money. This option satisfies the condition put in the question.