When pricing an option strategy in terms of pay-offs, involving multiple strikes

Question

When pricing an option strategy in terms of pay-offs, involving multiple strikes or expirations, certain strategies include the pricing of the underlying asset and some strategies do not.

a) This is because the pricing of the underlying is included in the option’s pricing as the option’s intrinsic value

b) The strategy may or may not include the assumption you own the underlying, if so, the change in pricing of the underlying must be included in your pay-off.

c) The strategy must always include the underlying else pay-offs could be over or under stated.

d) The underlying is important in determining intrinsic value but otherwise does not affect the level of payoff.

Explanation / Answer

This is the correct answer.

b) The strategy may or may not include the assumption you own the underlying, if so, the change in pricing of the underlying must be included in your pay-off.

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