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Hi Sir,
Could you please suggest if the understanding is correct . we always deduct premium no matter we are buying put or call options except with the collar when the premium received for selling the call reduces the premium payable for the purchase of put.
Also do you expect questions like conejo to come in section A based on the current syllabus.
Thanks for your support as always
Premiums are always payable (except as you say, when an option is sold in order to create a collar).
However, be careful when saying ‘we always deduct’. If the transaction involves receiving money or depositing money (in the case of interest rate risk management) then the premium is deducted from the receipt. If the transaction involves paying money or borrowing money, then the premium is added because it is an extra payment.
Although the most of Conejo involves topics that are not asked too often, it is all still in the syllabus and could certainly be asked again.
In case of collar please explain when are we going to deduct premiums and when are we going to add them
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