Question 1

Each of the following is a bullish strategy except

Accepted Answer

A)  a long call 
B)  a short put 
C)  a short stock 
D)  a protective put 
E)  none of the above 
A)  a long call 
B)  a short put 
C)  a short stock 
D)  a protective put 
E)  none of the above

Question 2

A covered call writer who prefers even less risk should

Accepted Answer

A)  get rid of the call 
B)  switch to a call with a lower exercise price 
C)  get rid of the stock 
D)  switch to a call with a higher exercise price 
E)  none of the above 
A)  get rid of the call 
B)  switch to a call with a lower exercise price 
C)  get rid of the stock 
D)  switch to a call with a higher exercise price 
E)  none of the above

Question 3

A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following strategies has the greatest potential loss?

Accepted Answer

A)  an uncovered call 
B)  a long put 
C)  a covered call 
D)  a long position in the stock 
E)  it is impossible to tell 
A)  an uncovered call 
B)  a long put 
C)  a covered call 
D)  a long position in the stock 
E)  it is impossible to tell

Question 5

A synthetic long call position can be created with which of the following sets of transactions.

Accepted Answer

A)  borrow the present value of the strike price, sell stock, sell put 
B)  lend the present value of the strike price, sell stock, buy put 
C)  sell put, buy stock, lend the present value of the strike price 
D)  buy stock, buy put, borrow the present value of the strike price 
E)  none of the above creates a synthetic long call position 
A)  borrow the present value of the strike price, sell stock, sell put 
B)  lend the present value of the strike price, sell stock, buy put 
C)  sell put, buy stock, lend the present value of the strike price 
D)  buy stock, buy put, borrow the present value of the strike price 
E)  none of the above creates a synthetic long call position

Question 6

A covered call with a higher exercise price has a higher breakeven.

Accepted Answer

A) True 
 B)False

Question 7

Consider two put options differing only by exercise price. The one with the higher exercise price has

Accepted Answer

A)  the lower breakeven and lower profit potential 
B)  the lower breakeven and greater profit potential 
C)  the higher breakeven and greater profit potential 
D)  the higher breakeven and lower profit potential 
E)  the greater premium and lower profit potential 
A)  the lower breakeven and lower profit potential 
B)  the lower breakeven and greater profit potential 
C)  the higher breakeven and greater profit potential 
D)  the higher breakeven and lower profit potential 
E)  the greater premium and lower profit potential

Question 8

Suppose the investor constructed a covered call. At expiration the stock price is $27. What is the investor's profit?

Accepted Answer

A)  $589 
B)  $289 
C)  $2,989 
D)  $2,711 
E)  none of the above 
A)  $589 
B)  $289 
C)  $2,989 
D)  $2,711 
E)  none of the above

Question 9

What is the maximum profit that the writer of a call can make?

Accepted Answer

A)  $2,711 
B)  $289 
C)  $3,000 
D)  $3,289 
E)  none of the above 
A)  $2,711 
B)  $289 
C)  $3,000 
D)  $3,289 
E)  none of the above

Question 10

Covered call writing should be considered a strategy to enhance the return on a stock.

Accepted Answer

A) True 
 B)False

Question 11

If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36, what is the investor's profit?

Accepted Answer

A)  $600 
B)  $311 
C)  $889 
D)  $229 
E)  none of the above 
A)  $600 
B)  $311 
C)  $889 
D)  $229 
E)  none of the above

Question 12

A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market.

Accepted Answer

A) True 
 B)False

Question 13

To maximize profits on a call purchase, one should hold the position for as short a time as possible.

Accepted Answer

A) True 
 B)False

Question 14

If ST > X, then the profit for a call option can be expressed as: Π = ST - X - C.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following investors may be obligated to buy stock?

Accepted Answer

A)  covered call writer 
B)  call buyer 
C)  put writer 
D)  protective put buyer 
E)  none of the above 
A)  covered call writer 
B)  call buyer 
C)  put writer 
D)  protective put buyer 
E)  none of the above

Question 16

A long put option position can be synthetically created by purchasing a call option, short selling the stock, and purchasing a pure discount bond with face value equal to the strike price.

Accepted Answer

A) True 
 B)False

Question 17

The profit from a covered call is the profit from a long stock plus the profit from a long call.

Accepted Answer

A) True 
 B)False

Question 18

Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration.

Accepted Answer

A) True 
 B)False

Question 19

To reach breakeven on a call purchase held to expiration, the stock price must exceed the exercise price by at least the amount of the call premium.

Accepted Answer

A) True 
 B)False

Question 20

Consider the following statement related to buying a put option. For a given stock price, the ____________ the position is held, the more time value it loses and the ___________ the profit; however, an exception can occur when the stock price is ___________. Identify the correct words for these two blanks.

Accepted Answer

A)  longer, lower, low 
B)  longer, higher, high 
C)  shorter, lower, low 
D)  shorter, higher, high 
E)  longer, flatter, low 
A)  longer, lower, low 
B)  longer, higher, high 
C)  shorter, lower, low 
D)  shorter, higher, high 
E)  longer, flatter, low

Each of the following is a bullish strategy except

A covered call writer who prefers even less risk should

A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.

Which of the following strategies has the greatest potential loss?

A synthetic long call position can be created with which of the following sets of transactions.

A covered call with a higher exercise price has a higher breakeven.

Consider two put options differing only by exercise price. The one with the higher exercise price has

Suppose the investor constructed a covered call. At expiration the stock price is $27. What is the investor's profit?

What is the maximum profit that the writer of a call can make?

Covered call writing should be considered a strategy to enhance the return on a stock.

If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36, what is the investor's profit?

A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market.

To maximize profits on a call purchase, one should hold the position for as short a time as possible.

If S_T > X, then the profit for a call option can be expressed as: Π = S_T - X - C.

Which of the following investors may be obligated to buy stock?

A long put option position can be synthetically created by purchasing a call option, short selling the stock, and purchasing a pure discount bond with face value equal to the strike price.

The profit from a covered call is the profit from a long stock plus the profit from a long call.

Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration.

To reach breakeven on a call purchase held to expiration, the stock price must exceed the exercise price by at least the amount of the call premium.

Consider the following statement related to buying a put option. For a given stock price, the ______ the position is held, the more time value it loses and the _ the profit; however, an exception can occur when the stock price is _______. Identify the correct words for these two blanks.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 6: Basic Option Strategies

Each of the following is a bullish strategy except

A covered call writer who prefers even less risk should

A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.

Which of the following strategies has the greatest potential loss?

A synthetic long call position can be created with which of the following sets of transactions.

A covered call with a higher exercise price has a higher breakeven.

Consider two put options differing only by exercise price. The one with the higher exercise price has

Suppose the investor constructed a covered call. At expiration the stock price is $27. What is the investor's profit?

What is the maximum profit that the writer of a call can make?

Covered call writing should be considered a strategy to enhance the return on a stock.

If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36, what is the investor's profit?

A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market.

To maximize profits on a call purchase, one should hold the position for as short a time as possible.

If ST > X, then the profit for a call option can be expressed as: Π = ST - X - C.

Which of the following investors may be obligated to buy stock?

A long put option position can be synthetically created by purchasing a call option, short selling the stock, and purchasing a pure discount bond with face value equal to the strike price.

The profit from a covered call is the profit from a long stock plus the profit from a long call.

Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration.

To reach breakeven on a call purchase held to expiration, the stock price must exceed the exercise price by at least the amount of the call premium.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

If S_T > X, then the profit for a call option can be expressed as: Π = S_T - X - C.