Question 1

The risk of early exercise is of no concern to the holder of a long straddle.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements best describes the nature of option time value decay?

Accepted Answer

A)  time value decays more rapidly as the stock price approaches being at-the-money 
B)  time value decays more rapidly as expiration approaches 
C)  time value decays more rapidly for put option than call options 
D)  time value decay does not occur for collar option strategies 
E)  time value decay is detrimental for a trader who is short call options 
A)  time value decays more rapidly as the stock price approaches being at-the-money 
B)  time value decays more rapidly as expiration approaches 
C)  time value decays more rapidly for put option than call options 
D)  time value decay does not occur for collar option strategies 
E)  time value decay is detrimental for a trader who is short call options

Question 3

A ratio spread can be conducted with money spreads or time spreads.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is the best strategy for an expected fall in the market?

Accepted Answer

A)  long strip (2 puts and 1 call) 
B)  put bull spread 
C)  calendar spread 
D)  butterfly spread 
E)  none of the above 
A)  long strip (2 puts and 1 call) 
B)  put bull spread 
C)  calendar spread 
D)  butterfly spread 
E)  none of the above

Question 5

A collar gives downside protection, leaving the upside open.

Accepted Answer

A) True 
 B)False

Question 6

What will the straddle cost?

Accepted Answer

A)  $145 
B)  $690 
C)  $971 
D)  $413 
E)  none of the above 
A)  $145 
B)  $690 
C)  $971 
D)  $413 
E)  none of the above

Question 7

The purchase of one option and the sale of another is known as

Accepted Answer

A)  box 
B)  bear strategy 
C)  bull strategy 
D)  collar 
E)  spread 
A)  box 
B)  bear strategy 
C)  bull strategy 
D)  collar 
E)  spread

Question 8

What will the spread cost?

Accepted Answer

A)  -$176 
B)  $176 
C)  $558 
D)  $105 
E)  none of the above 
A)  -$176 
B)  $176 
C)  $558 
D)  $105 
E)  none of the above

Question 9

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

Accepted Answer

A) True 
 B)False

Question 10

The holder of a straddle does not care which way the market moves as long as it makes a significant move.

Accepted Answer

A) True 
 B)False

Question 11

Buying a put money spread is a bearish strategy.

Accepted Answer

A) True 
 B)False

Question 12

Early exercise is an important risk when call bear spreads and put bull spreads are used.

Accepted Answer

A) True 
 B)False

Question 13

The profit from a put bear spread strategy when both options are out of the money is

Accepted Answer

A)  -X1 + ST + P1 + X2 - ST - P2 
B)  -X1 + ST + P1 - P2 
C)  X1 - ST - P1 - X2 + ST + P2 
D)  P1 + X2 - ST - P2 
E)  P1 - P2 
A)  -X1 + ST + P1 + X2 - ST - P2 
B)  -X1 + ST + P1 - P2 
C)  X1 - ST - P1 - X2 + ST + P2 
D)  P1 + X2 - ST - P2 
E)  P1 - P2

Question 14

A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.

Accepted Answer

A) True 
 B)False

Question 15

Suppose a put is added to a straddle. This overall transaction is called a strip. Determine the profit at expiration on a strip if the stock price at expiration is $36.

Accepted Answer

A)  -$129 
B)  $1,416 
C)  $429 
D)  $1,384 
E)  none of the above
Answer questions 18 through 20 about a long box spread using the June 50 and 55 options. 
A)  -$129 
B)  $1,416 
C)  $429 
D)  $1,384 
E)  none of the above
Answer questions 18 through 20 about a long box spread using the June 50 and 55 options.

Question 16

A call bear spread is a strategy for investors who expect stock prices to increase.

Accepted Answer

A) True 
 B)False

Question 17

What will be the profit if the stock price at expiration is $52.50?

Accepted Answer

A)  $171 
B)  $1,421 
C)  $1.037 
D)  $421 
E)  none of the above 
A)  $171 
B)  $1,421 
C)  $1.037 
D)  $421 
E)  none of the above

Question 18

What is the net present value of the box spread?

Accepted Answer

A)  $9.84 
B)  $5.00 
C)  $16.00 
D)  $1.84 
E)  none of the above 
A)  $9.84 
B)  $5.00 
C)  $16.00 
D)  $1.84 
E)  none of the above

Question 19

Which of the following have similar profit graphs?

Accepted Answer

A)  call bull spread and long box spread 
B)  put bear spread and short box spread 
C)  butterfly spread and ratio spread 
D)  calendar spread and call bear spread 
E)  none of the above 
A)  call bull spread and long box spread 
B)  put bear spread and short box spread 
C)  butterfly spread and ratio spread 
D)  calendar spread and call bear spread 
E)  none of the above

Question 20

Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50?

Accepted Answer

A)  $41 
B)  $198 
C)  $302 
D)  $102 
E)  none of the above
For questions 7 and 8, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. 
A)  $41 
B)  $198 
C)  $302 
D)  $102 
E)  none of the above
For questions 7 and 8, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.

The risk of early exercise is of no concern to the holder of a long straddle.

Which of the following statements best describes the nature of option time value decay?

A ratio spread can be conducted with money spreads or time spreads.

Which of the following is the best strategy for an expected fall in the market?

A collar gives downside protection, leaving the upside open.

What will the straddle cost?

The purchase of one option and the sale of another is known as

What will the spread cost?

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

The holder of a straddle does not care which way the market moves as long as it makes a significant move.

Buying a put money spread is a bearish strategy.

Early exercise is an important risk when call bear spreads and put bull spreads are used.

The profit from a put bear spread strategy when both options are out of the money is

A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.

Suppose a put is added to a straddle. This overall transaction is called a strip. Determine the profit at expiration on a strip if the stock price at expiration is $36.

A call bear spread is a strategy for investors who expect stock prices to increase.

What will be the profit if the stock price at expiration is $52.50?

What is the net present value of the box spread?

Which of the following have similar profit graphs?

Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50?

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic 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 7: Advanced Option Strategies

The risk of early exercise is of no concern to the holder of a long straddle.

Which of the following statements best describes the nature of option time value decay?

A ratio spread can be conducted with money spreads or time spreads.

Which of the following is the best strategy for an expected fall in the market?

A collar gives downside protection, leaving the upside open.

What will the straddle cost?

The purchase of one option and the sale of another is known as

What will the spread cost?

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

The holder of a straddle does not care which way the market moves as long as it makes a significant move.

Buying a put money spread is a bearish strategy.

Early exercise is an important risk when call bear spreads and put bull spreads are used.

The profit from a put bear spread strategy when both options are out of the money is

A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.

Suppose a put is added to a straddle. This overall transaction is called a strip. Determine the profit at expiration on a strip if the stock price at expiration is $36.

A call bear spread is a strategy for investors who expect stock prices to increase.

What will be the profit if the stock price at expiration is $52.50?

What is the net present value of the box spread?

Which of the following have similar profit graphs?

Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50?

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic 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