You boss expects prices to go up in the near future and wants to use an...

You boss expects prices to go up in the near future and wants to use an option strategy. Explain to your boss when he wants to use the following strategies:

A naked call option purchased
A naked put option sold
A bull money spread using calls starting at the same strike price as in Part 1
A bull money spread using puts starting at the same strike price as in Part 1

Expert Solution

Answer:-

A naked call is exactly the opposite of a covered call. The buyer of a call option has the right to buy specific number of shares from the call option seller at a strike price at an expiration date. The naked call option causes loses if the price rises significantly.

A naked put is a strategy used when an investor sells a put option without having sufficient funds in the account to cover the purchase if the option is exercised.

A bull money spread using calls is an options trading strategy that benefits from a stock's limited increase in price.A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Both calls have the same underlying stock and the same expiration date.

In case of bull money spread using puts an investor buys a put option and pays a premium and then the investor sells a put option at a higher strike price than the purchased put that is receiving a premium. Both the put options have the same expiration date.

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