Question 1

Which of the following statements about a covered call writing strategy is true?

Accepted Answer

A) the losses are limited 
B) return and risk are greater than that of simply holding the stock 
C) it is a cheaper form of insurance than a protective put 
D) it generally makes a large number of small profits 
E) none of the above 
A) the losses are limited 
B) return and risk are greater than that of simply holding the stock 
C) it is a cheaper form of insurance than a protective put 
D) it generally makes a large number of small profits 
E) none of the above D

Question 2

What is the breakeven stock price at expiration for the transaction described in problem 6?

Accepted Answer

A) $27.11 
B) $30.00 
C) $32.89 
D) $29.89 
E) none of the above 
A) $27.11 
B) $30.00 
C) $32.89 
D) $29.89 
E) none of the above A

Question 3

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

Accepted Answer

A) a short put 
B) a covered call 
C) a protective put 
D) a synthetic call 
E) none of the above 
A) a short put 
B) a covered call 
C) a protective put 
D) a synthetic call 
E) none of the above E

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

A protective put provides the same type of profit diagram as a long call.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

What is the maximum profit on the transaction described in problem 1?

Accepted Answer

A) $2,711 
B) infinity 
C) zero 
D) $3,289 
E) $3,000 
A) $2,711 
B) infinity 
C) zero 
D) $3,289 
E) $3,000

Question 10

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

Accepted Answer

A) $32.89 
B) $30.00 
C) $27.11 
D) $32.15 
E) there is no breakeven 
A) $32.89 
B) $30.00 
C) $27.11 
D) $32.15 
E) there is no breakeven

Question 11

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 12

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 13

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

The maximum loss on a call purchase is the premium on the call.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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

Accepted Answer

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

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Covered calls are a less costly way to protect stocks because you receive money for the sale of the call,whereas you must pay money for a protective put.

Accepted Answer

A) True 
 B)False

Question 20

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

Which of the following statements about a covered call writing strategy is true?

What is the breakeven stock price at expiration for the transaction described in problem 6?

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

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

A covered call writer who prefers even less risk should

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

A protective put provides the same type of profit diagram as a long call.

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

What is the maximum profit on the transaction described in problem 1?

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

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

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.

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

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

The maximum loss on a call purchase is the premium on the call.

Each of the following is a bullish strategy except

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

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

Covered calls are a less costly way to protect stocks because you receive money for the sale of the call,whereas you must pay money for a protective put.

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

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

The 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 Applications

Managing Risk in an Organization

Filters

Exam 6: Basic Option Strategies

Which of the following statements about a covered call writing strategy is true?

What is the breakeven stock price at expiration for the transaction described in problem 6?

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

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

A covered call writer who prefers even less risk should

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

A protective put provides the same type of profit diagram as a long call.

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

What is the maximum profit on the transaction described in problem 1?

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

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

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.

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

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

The maximum loss on a call purchase is the premium on the call.

Each of the following is a bullish strategy except

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

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

Covered calls are a less costly way to protect stocks because you receive money for the sale of the call,whereas you must pay money for a protective put.

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

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

The 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 Applications

Managing Risk in an Organization

Filters