Question: 1. You long a put with maturity at T with strike K = $4,000. You short a put on the same underlying asset with
1. You long a put with maturity at T with strike K = $4,000. You short a put on the same underlying asset with strike K = $4,500. ST is the price of the underlying asset at maturity. (i) What is your cash flow at time T (not accounting for any costs of purchasing the portfolio) if a) ST K, b) K < ST < K and c) K, ST. (ii) Which put is more expensive? Will you make an overall profit or loss if S K? (iii) Is this strategy bearish (makes money when stock prices fall) or bullish (makes money when stock prices rise)?
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Lets break it down i a If ST leq K1 4000 both puts are in the money You have to ... View full answer
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