Explanation:
A payoff is triggered when a stock’s price () closes above in this European-style option strategy. There will be a positive payoff if the stock closes above . It is possible to have a negative cash flow if is lower than .
(Book 3, Module 41.2, LO 41.e)
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Question 42
Which of the following statements regarding gap options is correct?
A
A payoff is triggered as soon as the stock’s price crosses the first strike price ().
B
A positive payoff will occur if and closes < .
C
The worst-case scenario for a gap option is a zero payoff.
D
A positive payoff will occur if and closes > .
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