Equity options usually exhibit a 'skew' with Black-Scholes implied volatilities higher for low-strike options than for high-strike options. In the presence of a steep skew, is it possible for a 10% out-of-the-money put to trade for more than an otherwise-identical 5% out-of-the-money put?
An investor buying a 3-month ATM call option and selling a 1-month ATM call option in the same underlying name, is expecting
A common application of the risk-reversal trade (long an OTM put, short an OTM call) is to hedge an existing long exposure. The investor gives up some of the upside in exchange for downside protection. Which of the following is true?
An investor owning MSFT stock enters into a 'costless collar' (costless risk reversal) by buying out-of-the-money puts and selling out-of-the-money calls on all his MSFT shares. Considering absolute returns (no benchmark), which of the following is false?
Which investor is most negatively affected by time decay? An investor who is