Investors can form the risk and return characteristics of their option positions by combining calls, puts, stocks, and bonds. Combination of options with other financial instruments also allows more precise speculative strategies. Using some hypothetical examples of your own, explain the following option combinations:
1) The long straddle (Buy one call option and one put option on the same underlying stock with the same exercise price and time to expiration)
2) The long strangle (Buy one call option and one put option on the same underlying stock with the same time to expiration but different exercise prices (Call’s exercise price must be higher than the Put’s))
3) The bull spread with calls
4) The bear spread with puts
5) The covered call
6) Portfolio insurance