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Answer: Only the bear spread with calls
A **bear spread with calls** is a **credit spread** (it generates an initial cash inflow) and it profits when the stock price falls. ### Why the other spreads do not fit both conditions - **Bull spread with calls**: typically requires an initial cost and profits if the stock rises. - **Bull spread with puts**: generates an initial inflow, but profits if the stock rises, not if it drops. - **Butterfly spread with calls/puts**: generally involves an initial cost and is designed to profit when the stock is near the middle strike. - **Bear spread with puts**: profits if the stock falls, but usually requires an initial cost. - **Calendar spread with calls/puts**: does not fit the requirement of profiting from a significant stock drop in the standard construction. Therefore, the only strategy that satisfies **both** conditions is: **Only the bear spread with calls.**
Author: Manit Arora
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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
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