Deck 7: Advanced Option Strategies

Question 1

What is the profit if the stock price at expiration is $52.50?

A) $16
B) $500
C) -$234
D) $250
E) none of the above

Answer 1

A

Question 2

What will be the profit if the spread is held 90 days and the stock price is $45?

A) $36
B) $20
C) $558
D) -$20
E) none of the above
Answer questions 12 through 17 about a long straddle constructed using the June 50 options.

Answer 2

D

Question 3

What is the maximum loss on the spread?

A) $500
B) $698
C) $198
D) $802
E) none of the above

Answer 3

E

Question 4

What are the two breakeven stock prices at expiration?

A) $55.58 and $45.87
B) $54.13 and $45.87
C) $55.58 and $44.42
D) $59.71 and $40.29
E) none of the above

Question 5

What is the profit if the position is held for 90 days and the stock price is $55?

A) -$971
B) -$58
C) -$109
D) -$471
E) none of the above

Question 6

What is the profit if the stock price at expiration is at $64.75?

A) -$971
B) $1,475
C) -$3,525
D) $500
E) none of the above

Question 7

What is the cost of the box spread?

A) $500
B) $2,018
C) $76
D) $484
E) none of the above

Question 8

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.

A) -$129
B) $1,416
C) $429
D) $1,384
E) none of the above
Answer questions 18 through 20 about a long box spread using the June 50 and 55 options.

Question 9

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

A) $41
B) $198
C) $302
D) $102
E) none of the above
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.

Question 10

What is the maximum profit on the spread?

A) $500
B) $802
C) $198
D) $302
E) none of the above

Question 11

What will the straddle cost?

A) $145
B) $690
C) $971
D) $413
E) none of the above

Question 12

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?

A) 105
B) 95
C) 100
D) 57
E) none of the above
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.

Question 13

What will be the cost of the butterfly spread?

A) $1,195
B) $637
C) $79
D) $1,045
E) none of the above

Question 14

What is the net present value of the box spread?

A) $9.84
B) $5.00
C) $16.00
D) $1.84
E) none of the above

Question 15

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

A) $171
B) $1,421
C) $1.037
D) $421
E) none of the above

Question 16

What is the breakeven point?
A) $48.02

A) none of the above
B) $41.98
C) $55.66
D) $50.00

Question 17

What will the spread cost?

A) -$176
B) $176
C) $558
D) $105
E) none of the above

Question 18

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?

A) lower both the upside and downside breakevens
B) raise both the upside and downside breakevens
C) raise the upside and lower the downside breakevens
D) lower the upside and raise the downside breakevens
E) none of the above

Question 19

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?

A) $986
B) $302
C) $283
D) $193
E) none of the above

Question 20

What is the profit if the stock price at expiration is $47?

A) -$102
B) $398
C) -$302
D) $500
E) none of the above

Question 21

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

Question 22

A call butterfly spread is a bullish strategy that is profitable if stock prices increase.

Question 23

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

A) box
B) bear strategy
C) bull strategy
D) collar
E) spread

Question 24

Early exercise is a disadvantage in which of the following transactions?

A) short box spread
B) put bear spread
C) long strip (2 puts and 1 call)
D) long strap (2 calls and 1 put)
E) none of the above

Question 25

There are three breakeven stock prices in a butterfly spread.

Question 26

Which of the following have similar profit graphs?

A) call bull spread and long box spread
B) put bear spread and short box spread
C) butterfly spread and ratio spread
D) calendar spread and call bear spread
E) none of the above

Question 27

The option strategy where the holder of a long position in a stock buys a put with an exercise price lower than the current stock price and sells a call with an exercise price higher than the current stock price is known as

A) box
B) bear strategy
C) bull strategy
D) collar
E) spread

Question 28

Buying a put money spread is a bearish strategy.

Question 29

Which of the following transactions can have an unlimited loss?

A) long straddle
B) calendar spread
C) butterfly spread
D) reverse box spread
E) none of the above

Question 30

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

A) put bull spread
B) long straddle
C) collar
D) call bull spread
E) none of the above

Question 31

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

Question 32

A call bear spread is a strategy for investors who expect stock prices to increase.

Question 33

Which of the following is the best strategy for an expected fall in the market?

A) long strip (2 puts and 1 call)
B) put bull spread
C) calendar spread
D) butterfly spread
E) none of the above

Question 34

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

Question 35

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.

Question 36

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

Question 37

The profit from a put bear spread strategy when both options are out of the money is

A) -X₁ + S_T + P₁ + X₂ - S_T - P₂
B) -X₁ + S_T + P₁ - P₂
C) X₁ - S_T - P₁ - X₂ + S_T + P₂
D) P₁ + X₂ - S_T - P₂
E) P₁ - P₂

Question 38

"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?

A) volatility
B) expected rate of return
C) beta
D) correlation with the benchmark index
E) skewness

Question 39

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

A) time value decays more rapidly as the stock price approaches being at-the-money
B) time value decays more rapidly as expiration approaches
C) time value decays more rapidly for put option than call options
D) time value decay does not occur for collar option strategies
E) time value decay is detrimental for a trader who is short call options

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

The longer an investor holds a long call butterfly spread position, everything else the same, the greater the distance between the breakeven stock prices.

Question 48

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.

Question 49

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

Question 50

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

Question 51

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.

Question 52

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

Question 53

The risk of early exercise is of no concern to the holder of a long straddle.

Question 54

The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.

Question 55

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

Question 56

If a straddle is closed prior to expiration, the investor can recover some of the time value of either the call or the put but not both.

Question 57

To truly gain from a straddle, an investor must have a better estimate of volatility than everyone else.

Question 58

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

Question 59

A collar gives downside protection, leaving the upside open.

Question 60

An investor who holds a strap (2 calls and 1 put) believes the market is more likely to go up than down.