Explanation:
Correct answer: False
For the buyer of a compound option, the maximum loss is generally limited to the premium paid for the compound option. That is the key feature of a long option position.
The statement is too strong because it claims that a put-on-a-call offers the worst loss potential among all four compound option types. The buyer of any of the four compound options does not face open-ended loss in the way a short option writer might.
So the statement is incorrect as written.
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Q-13.5. P2.T5.13. Compound options. In regard to compound options is each the following TRUE or FALSE? To the buyer (long) of each of the four compound option types, the put-on-a-call compound option offers the worst ultimate loss potential under an adverse scenario.
A
True
B
False
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