Exam 6: Basic Option Strategies

Which of the following transactions does not profit in a strong bull market.

Which of the following statements is true about the purchase of a protective put at a higher exercise price relative to a lower exercise price?

The following is the profit equation for a put option: Π = N_P[Max(0, X - S_T) + P].

The breakeven for a protective put is the same as that for a covered call.

Both call and put writers have the potential for unlimited losses.

Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.

The holder of a protective put has the equivalent of an insurance policy on the stock.

What is your profit if you buy a call, hold it to expiration and the stock price at expiration is $37?

What is the minimum profit from the transaction described in Question 6 if the position is held to expiration?

Early exercise imposes a risk to all but one of the following transactions.

Identify the correct statement related to the choice of exercise price for buying a call.

What is the breakeven stock price at expiration on the transaction described in problem 1?

Given two bearish investors, the more risk averse investor would tend to select a put with a higher exercise price.

In the context of insurance, protective put buyers who choose lower exercise prices are essentially using higher deductibles.

A synthetic short put position can be created with which of the following sets of transactions.

A synthetic put is always less expensive than a synthetic call.

A covered call writer will make a lower profit if the option is exercised early.

Selling a put is a bullish strategy that has a limited gain (the premium) and a large, but limited, potential loss.

Buying a put is the mirror image of buying a call.

Which of the following statements is true about closing a long call position prior to expiration relative to holding it to expiration?