Exam 7: Advanced Option Strategies

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. For questions 1 through 6,consider a bull money spread using the March 45/50 calls. -How much will the spread cost?

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. For questions 1 through 6,consider a bull money spread using the March 45/50 calls. -What is the maximum profit on the spread?

A spread that is profitable if the options are in-the-money is called a money spread.

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 12 through 17 about a long straddle constructed using the June 50 options. -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.

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 12 through 17 about a long straddle constructed using the June 50 options. -What will the straddle cost?

The profit from a collar option strategy when the terminal stock price ends up in between the two strike prices is S_T - S₀ - P₁ + C₂ where X₂ > X₁.

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 12 through 17 about a long straddle constructed using the June 50 options. -Suppose the investor adds a call to the long straddle,a transaction known as a strap.What will this do to the breakeven stock prices?

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. -Suppose you wish to construct a ratio spread using the March and June 50 calls.You want to buy 100 June 50 call contracts.How many March 50 calls would you sell?

At the expiration of a box spread,at most there will be only one option exercised.

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 18 through 20 about a long box spread using the June 50 and 55 options. -What is the profit if the stock price at expiration is $52.50?

The breakeven points for a long straddle strategy are equidistant from the current stock price regardless of the chosen strike price.

One of the risks of a calendar spread is that the intrinsic values may be different.

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

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 18 through 20 about a long box spread using the June 50 and 55 options. -What is the cost of the box spread?

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. For questions 1 through 6,consider a bull money spread using the March 45/50 calls. -What is the maximum loss on the spread?

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. For questions 1 through 6,consider a bull money spread using the March 45/50 calls. -What is the breakeven point? A)$48.02 A)none of the above B)$41.98 C)$55.66 D)$50.00

A spread option strategy is a transaction in one option and an opposite transaction in the underlying instrument.

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 12 through 17 about a long straddle constructed using the June 50 options. -What is the profit if the position is held for 90 days and the stock price is $55?

The delta of a straddle would be the call delta plus the put delta.

The following prices are available for call and put options on a stock priced at $50.The risk-free rate is 6 percent and the volatility is 0.35.The March options have 90 days remaining and the June options have 180 days remaining.The Black-Scholes model was used to obtain the prices. Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares)unless otherwise indicated. Answer questions 12 through 17 about a long straddle constructed using the June 50 options. -What is the profit if the stock price at expiration is at $64.75?