Question

In an options spread, how do you determine which leg is dominant if no premiums are given?

1) The leg with the higher strike price is dominant
2) The leg with the lower strike price is dominant
3) The leg with the longer expiration date is dominant
4) The leg with the shorter expiration date is dominant

Answer 1

In an options spread, the dominant leg can be determined based on the strategy being employed and the strike prices. The expiration dates do not determine dominance, but the option with the longer expiration date can be considered more expensive in the absence of premiums. The correct answer is option 1) The leg with the higher strike price is dominant.

Step-by-step explanation:

In an options spread, the dominant leg will depend on the strategy being employed. The leg with the higher strike price is dominant in a bull spread (buying a lower strike price option and selling a higher strike price option). Conversely, the leg with the lower strike price is dominant in a bear spread (selling a lower strike price option and buying a higher strike price option).

The expiration dates do not determine dominance in a spread. However, if premiums are not given, you can consider the option with the longer expiration date to be the more expensive leg, as it allows for more time for the underlying asset to move in the desired direction.