protective put, covered calls, straddle, spreads, and collars. explain how these strategies work, and provide a...

protective put, covered calls, straddle, spreads, and collars. explain how these strategies work, and provide a specific example.

Expert Solution

Protective put - When the underlying stock is held, and put options on the stock are bought. This strategy will cap the losses on the stock. For example, Stock A is owned which is currently trading at $50. Put options with strike price of $48 are bought. In this case, if the price of Stock A falls below $48, the gains on the put option will offset the loss on the stock. The selling price of the stock is locked in at $48

Covered call - When the underlying stock is held, and call options on the stock are sold. This strategy will cap the profits on the stock, but provide additional income if the stock price does not rise above the strike price. For example, Stock A is owned which is currently trading at $50. Put options with strike price of $52 are sold. In this case, if the price of Stock A stays below $52, the premium received on the call option will be income. However if the stock price rise above $52, the losses on the call option will be offset by the gains on the stock

A long straddle is when a call and put option of the same underlying, same strike price and same expiry are bought. The total premium paid is the breakeven. If the stock price at expiry is more than (strike price + premium paid), or less than (strike price - premium paid), the option position is in profit.

A short straddle is when a call and put option of the same underlying, same strike price and same expiry are sold. The total premium received is the breakeven. If the stock price at expiry is less than (strike price + premium paid), or more than (strike price - premium paid), the option position is in profit.

A spread can be a bull call spread or a bear put spread. A bull call spread is when a call option of a lower strike is bought, and a call option of a higher strike is sold. A bear put spread is when a put option of a higher strike is bought, and a put option of a lower strike is sold

An option collar strategy is when the underlying stock is owned, and a put option is bought of a lower strike, and a call option of a higher strike is sold. It is a combination of a covered call and protective put

jeff jeffy answered 6 months ago

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