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:

Marginal Product

The extra output or benefit received from using one additional unit of a resource.

Opportunity Cost

The cost of an alternative that must be forgone in order to pursue a certain action, the benefits you could have received by taking an alternative action.

Marginal Cost

The cost added by producing one more item of a product, a crucial factor in economic decision-making regarding production levels.

Economic Profit

The difference between a firm’s total revenues and its total costs, including both explicit and implicit costs, representing the actual financial gain.