Question in Book 5

D

Danae

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What's long stock??

Which of the following combinations of options and underlying investments have similarly shaped profit/loss diagrams?
A. covered call and protective put
B. covered call and short stock/long call
C. short put option/long call option and protective put
D. long call option/short put option and long stock position

Thanx a lot:)
 
D, if they have the same exercise price. The reason is because if you own a long call and the price of the underlying goes up, you will exercise it and if you own that with a short put with the same exercise and the price of the underlying goes down you will be assigned and have to buy the underlying. The long stock position gives you a linear return no matter where the price goes, same as the previous combination.

A) CC only gives you limited upside return and downside risk, a PP is like a long call

B) a short stock and long call is like the oposite of a protective put

C) SP/LC is like a long stock and a PP is just like a straight call option.



Edited 1 time(s). Last edit at Wednesday, April 26, 2006 at 08:42AM by jamespucyk.
 
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