Question 1

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 2

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

Accepted Answer

A) True 
 B)False

Question 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is the breakeven for a protective put?

Accepted Answer

A) X + S0 - P 
B) P + S0 
C) X - ST 
D) X - S0 - P 
E) none of the above 
A) X + S0 - P 
B) P + S0 
C) X - ST 
D) X - S0 - P 
E) none of the above

Question 9

What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

Accepted Answer

A) the call premium is essentially thrown away 
B) transaction costs tend to be high 
C) the stock will incur losses 
D) the call is more expensive when rolled over 
E) none of the above 
A) the call premium is essentially thrown away 
B) transaction costs tend to be high 
C) the stock will incur losses 
D) the call is more expensive when rolled over 
E) none of the above

Question 10

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

Accepted Answer

A) the profit is greater at all stock prices 
B) the profit is greater only at low stock prices 
C) the profit is greater only at high stock prices 
D) the range of possible profits is greater 
E) none of the above are true 
A) the profit is greater at all stock prices 
B) the profit is greater only at low stock prices 
C) the profit is greater only at high stock prices 
D) the range of possible profits is greater 
E) none of the above are true

Question 11

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

Accepted Answer

A) $700 
B) -$289 
C) $2,711 
D) $411 
E) none of the above 
A) $700 
B) -$289 
C) $2,711 
D) $411 
E) none of the above

Question 12

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 13

Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33.How much profit would the buyer make?

Accepted Answer

A) $32.89 
B) $30.11 
C) $78.00 
D) $11.00 
E) none of the above 
A) $32.89 
B) $30.11 
C) $78.00 
D) $11.00 
E) none of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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 18

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?

Accepted Answer

A) the breakeven is lower 
B) the maximum loss is greater 
C) the insurance is less costly 
D) the insurance is more costly 
E) none of the above 
A) the breakeven is lower 
B) the maximum loss is greater 
C) the insurance is less costly 
D) the insurance is more costly 
E) none of the above

Question 19

Which of the following strategies has essentially the same profit diagram as a covered call?

Accepted Answer

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

Question 20

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

Accepted Answer

A) True 
 B)False

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

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

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.

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

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?

An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.

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

Which of the following is the breakeven for a protective put?

What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

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

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

Which of the following strategies has the greatest potential loss?

Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33.How much profit would the buyer make?

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

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

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

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

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?

Which of the following strategies has essentially the same profit diagram as a covered call?

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

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

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

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

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.

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

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?

An advantage of using a put over a short sale is that the short sale requires an uptick or zero-plus tick while a put does not.

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

Which of the following is the breakeven for a protective put?

What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?

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

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

Which of the following strategies has the greatest potential loss?

Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33.How much profit would the buyer make?

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

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

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

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

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?

Which of the following strategies has essentially the same profit diagram as a covered call?

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

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