Identify the INCORRECT Statement About Spread Strategies Created by Trading

question 11

Multiple Choice

Identify the INCORRECT statement about spread strategies created by trading options of the same type (either all calls or all puts) on the same underlying with identical terms (unless noted otherwise) :

• A) Vertical spreads (also called money,perpendicular,or price spreads)are established by buying one option and selling another option with a different strike price.
• B) Horizontal spreads (or,time or calendar spreads)are established by buying one option and selling another option with the same strike but different maturity dates.
• C) Diagonal spreads are established by buying one option and selling another option that differ both in terms of strike price and maturity dates.
• D) A butterfly spread is created by trading four options with three different strike prices: two options with extreme strike prices are bought (written)and two options are written (bought)with the middle strike price.
• E) A condor spread is created by trading four options with three different strike prices: two options with extreme strike prices are bought (written)and two options are written (bought)with the same middle strike price.

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Definitions:

Land Rent

The payment made for the use of land or real estate.

Marginal Revenue Product

The additional revenue generated from employing one more unit of a resource or input.

Usury Laws

Legislation enacted to place a limit on the interest rate that can be charged on loans, intended to protect borrowers from excessively high rates.

Below-Market Interest Rate

An interest rate lower than the current market, usually subsidized by a government or institution.