1. Plots A, B, C and D describe different payoffs for put and call options at ex
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Question
1. Plots A, B, C and D describe different payoffs for put and call options at expiry. 10 20 10 10 20 30 10 underlying price ) underlying price (S) 10 10 20 30 10 20 underlying price ($) underlying price (S) Select the plot (A, B, C or D) which best describes the payoff at expiry for: (a) a long position for a put; (b) a writer of a call: (c) a short position for a put (d) best choice for a holder if the underlying's price is expected to rise substantially (e) payoff is possibly negative, but it is limited; (f) l argest loss in a very bullish market; (g) the most profitable choice in a very bearish market; (h) the payoff is unlimited (two choices)Explanation / Answer
(a) B. SinceThe long put option basic option trading where the investor buys put options with the belief that the price of the underlying security will go significantly below the strike price before the expiration date.
(b) C. A short call position is the opposite of a long call option position. Hence, it's payoff is mirror image in y-axis to that of long call.
(c) D. A short put position is the opposite of a long put option position. Hence, it's payoff is mirror image in y-axis to that of long put.
(d) A. If the price is believed to rise, then long position in call option is best.
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