Explanation:
A bear spread with calls is a credit spread (it generates an initial cash inflow) and it profits when the stock price falls.
Therefore, the only strategy that satisfies both conditions is:
Only the bear spread with calls.
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Q-727.3. James the trader is evaluating the following eight option spread trades (this includes all of Hull's spreads except the box spread):
He wants to implement a trade strategy that BOTH generates an initial cash inflow (as opposed to an initial cost) AND will produce a profit if the stock drops significantly. Among the eight strategies listed above, which will achieve this goal?
A
Only the bear spread with calls
B
Both bear spreads and the calendar spread with puts
C
Both bear spread, the butterfly spread with puts, and the calendar spread with puts
D
None of the trades both generate an initial inflow and produce a profit if the stock drops significantly