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8 August, 08:59

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? (hint:draw graphs and combine them) A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

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  1. 8 August, 09:16
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    Option D is correct option.

    Short call and long put

    Explanation:

    Short call and long put = - max (S - K, 0) + max (K - S, 0);

    As S declines, the payoff from long put position improves. As S increases, payoff from short call position loses money. This option satisfies the condition put in the question.
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