An investor has a bearish view of the stock, which he would like to take advantage of by constructing an option ‘spread’ strategy. Your goal is to maximize the initial cash inflow using this strategy. Suppose there exists the following options on the same underlying share of the stock. The share is currently trading in the market at $40.

1. Which options would you use for your spread strategy? Explain your answer.
2. Construct a payoff table for your option strategy. Show the payoff for individual options you use and the total payoff of the spread.
3. Draw a payoff diagram for your strategy, show the maximum and minimum level of payoff and strike price(s).

Option	Type	Strike Price
1	Call	$40
2	Call	$45
3	Call	$50
4	Put	$40
5	Put	$45
6	Put	$50

Answer rating: 100% (QA)

Solution Answera Bear Put strategy This strategy is taken when trader is bearish towards a particula... View the full answer