Question11 Which options would make profits in a falling market?(i) Buying a call option written on live cattle(ii) Selling a call option written on the S&P500 index(iii) Buying a put option written on Tesla stock(iv) Selling a put option written on Bitcoin (i) and (iii) (i) and (ii) (ii) and (iv) (iii) and (iv) (ii) and (iii) ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

We start by restating the question and listing the answer choices clearly so we can evaluate them one by one.
Options:
(i) Buying a call option written on live cattle
(ii) Selling a call option written on the S&P500 index
(iii) Buying a put option written on Tesla stock
(iv) Selling a put option written on Bitcoin

Now, evaluate each option in the context of a falling market:
- Option (i): Buying a call option on live cattle. A call option gives the holder the right to buy at a strike price. In a falling market, prices tend to move down, which makes call options less valuable because the likelihood of the price exceeding the strike decreases. Therefore, this position tends to lose value when markets fall, so it is unlikely to profit in a falling market. 
- Option (ii): Selling a call option on the S&P500 index. When you sell a call, you collect the premium upfront. If the market falls or stays flat, the call option is less likely to be exercised, and you keep the premium, which is profitable for a seller in a falling or sideways market. The risk is limited to the premium received if the market remains below the strike price.
- Option (iii): Buying a put option on Tesla stock. A put option gives the holder the right to sell at the strike price. In a falling market, Tesla’s price is more likely to drop below the strike, increasing the put’s intrinsic value. This position benefits from a decline in the underlying stock price, making it profitable in a falling market.
- Option (iv): Selling a put option on Bitcoin. Selling a put means you collect the premium, but if the price of Bitcoin falls below the strike price, the buyer may exercise the put, obligating the seller to buy at the strike price and potentially incurring losses. In a falling market, puts sold can be risky and not profitable if the price declines significantly, so this is not a reliable profit scenario in a falling market.

Next, compare the combinations to identify which pairs would profit in a falling market:
- Pair (i) and (iii): This combines buying a call in a falling market (likely unprofitable) with buying a put (profitable). The overall outcome depends on the magnitude of moves; however, the inclusion of the losing call reduces the certainty of profitability, so this pair is not as clearly profitable as others.
- Pair (i) and (ii): This mixes a likely losing call position with a selling of a call (profitable in a fall). The net effect is uncertain, and the loss from the call in (i) can offset gains from (ii).
- Pair (ii) and (iv): Selling a call (profitable in a fall) and selling a put (risky in a fall). The combination introduces potential significant downside risk from the sold put in a falling market, making this pair less robust for profits.
- Pair (iii) and (iv): Buying a put (profitable in a fall) paired with selling a put (risky in a fall) has mixed implications; while the bought put benefits from a drop, the sold put can incur losses if Bitcoin drops steeply, reducing reliability of profit.
- Pair (ii) and (iii): This pairing includes selling a call (profitable if the market falls or remains below the strike) and buying a put (profitable when the underlying declines). Both positions align with a falling market, providing complementary profit potential with limited overlap of adverse scenarios.

From this analysis, the combination that best aligns with a falling market and provides a coherent profit setup is (ii) and (iii).

Note on common misconceptions:
- Thinking that selling a call is always safe ignores the risk if the market rallies; here the scenario is falling, which helps the call seller but doesn’t guarantee subzero risk.
- Assuming buying a put is always profitable ignores volatility and time decay; while favorable in a fall, large time decay or insufficient price movement can hurt the option’s value.
- Believing selling a put is never risky in a falling market misses the exposure to large downward moves where the put buyer gains and the seller must buy at the strike price above market value.

In summary, the most coherent profit-bearing pairing in a falling market is selling a call on the S&P500 index (ii) together with buying a put on Tesla stock (iii).

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