Exam 6: Basic Option Strategies

An investor can construct a synthetic put by buying a call and selling short a stock.

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

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?

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.

To maximize profits on a call purchase,one should hold the position for as short a time as possible.

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

Which of the following strategies has the greatest potential loss?

Any strategy consisting of only long options will lose money if the stock price stays the same.

If S_T > X,then the profit for a call option can be expressed as: Π = S_T - X - C.

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

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10. -Suppose the investor constructed a covered call.At expiration the stock price is $27.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.

Which of the following is equivalent to a synthetic call?

The break-even stock price equation is similar for both calls and puts,the strike price plus the option premium.

As long as puts are available for trading,there is little justification for constructing synthetic puts.

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

A covered call writer who prefers even less risk should

Identify the correct statement related to the choice of exercise price for buying a call.

Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use this information to answer questions 1 through 10. -What is the minimum profit from the transaction described in Question 6 if the position is held to expiration?

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.