Series 7 practice questioneasyOptions — Spread Strategy Identification
An investor buys a put with a higher strike price and writes a put with a lower strike price, both with the same expiration. This is a:
- ABull put spread
- BStraddle
- CCalendar spread
- DBear put spread✓ Correct answer
Explanation
Why D — Bear put spread
Buying the higher strike put and writing the lower strike put creates a bear put spread (debit spread). The investor is bearish and profits when the stock falls. The higher strike put costs more, so the position is established at a net debit. Maximum profit occurs when the stock falls below the lower strike.
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