An up-and-out put may be preferred to a vanilla put
A) Because it results in higher payoffs in all circumstances.
B) Because it sometimes pays off even when the stock price rises whereas the vanilla only pays off when the stock price falls.
C) By an Investor with strong directional views because it is a cheaper form of taking on a directional bet.
D) By an investor more concerned with direction than volatility because the down-and-out put always reacts negatively to volatility unlike the vanilla put.

Question

Quizplus · Accepted Answer

An up-and-out put option can be preferred by an investor with strong directional views because it is typically cheaper than a vanilla put. This is because the up-and-out put has a barrier that, if reached, causes the option to expire worthless, thus adding a risk that the vanilla put does not have. This additional risk means the up-and-out put can be sold for a lower premium than a vanilla put, making it a more cost-effective choice for investors who are confident about their market predictions.

An Up-And-Out Put May Be Preferred to a Vanilla Put