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

"Like the butterfly spread,the calendar spread is one in which the underlying instrument's ___________ is the major factor in its performance." The best word for the blank is which of the following?

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 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. -What will be the cost of the butterfly spread?

A box spread is a combination of a call bull spread and a put bear spread.

In a calendar spread the time value of the nearby option will decay more rapidly.

Which of the following transactions can have an unlimited loss?

A box spread is a good strategy to use if high volatility is expected.

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.

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 10 and 11 about a calendar spread based on the assumption that stock prices are expected to remain fairly constant. Use the June/March 50 call spread. Assume one contract of each. -What will the spread cost?

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

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

A strip (2 puts and one call)would cost more than a straddle but would pay off more if the stock falls.

A strap is a less expensive bullish strategy than a straddle.

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

Which of the following strategies does not profit in a rising market?

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

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

A reverse calendar spread is used to take advantage of unexpected high volatility.

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

A call butterfly spread combines a call bull spread with a call bear spread.