Question
Making reasonable assumptions about option premia and strike prices, describe a position in crude oil options that will generate positive cash flow if oil prices
Making reasonable assumptions about option premia and strike prices, describe a position in crude oil options that will generate positive cash flow if oil prices are stable and negative cash flow if oil prices rise or fall substantially. The correct answer will involve two options positions. Create three charts. The first two charts should show the value at expiration of each position individually as a function of the spot price of crude oil on the expiration date. (Make reasonable assumptions about the options premia.) The third chart should show the value of the combined position. The spot price values on the horizontal axis in each chart should run from $40 to $80.
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