Deck 6: Basic Option Strategies

Question 1

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?

A)$600
B)$311
C)$889
D)$229
E)none of the above

Answer 1

D

Question 2

What is the breakeven stock price at expiration for the transaction described in problem 6?

A)$27.11
B)$30.00
C)$32.89
D)$29.89
E)none of the above

Answer 2

A

Question 3

Each of the following is a bullish strategy except

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

Answer 3

C

Question 4

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

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

Question 5

Which of the following strategies has the greatest potential loss?

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 6

What is the breakeven stock price at expiration on the transaction described in problem 1?

A)$32.89
B)$30.00
C)$27.11
D)$32.15
E)there is no breakeven

Question 7

Early exercise imposes a risk to all but one of the following transactions.

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

Question 8

Consider two put options differing only by exercise price.The one with the higher exercise price has

A)the lower breakeven and lower profit potential
B)the lower breakeven and greater profit potential
C)the higher breakeven and greater profit potential
D)the higher breakeven and lower profit potential
E)the greater premium and lower profit potential

Question 9

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?

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 10

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

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 11

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

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

Question 12

What is the maximum profit on the transaction described in problem 1?

A)$2,711
B)infinity
C)zero
D)$3,289
E)$3,000

Question 13

What is the maximum profit that the writer of a call can make?

A)$2,711
B)$289
C)$3,000
D)$3,289
E)none of the above

Question 14

Suppose the investor constructed a covered call.At expiration the stock price is $27.What is the investor's profit?

A)$589
B)$289
C)$2,989
D)$2,711
E)none of the above

Question 15

What is the maximum profit from the transaction described in Question 6 if the position is held to expiration?

A)$3,289
B)$289
C)infinity
D)$2,711
E)none of the above

Question 16

Which of the following is equivalent to a synthetic call?

A)a long stock and a short put position
B)a long put and a long stock position
C)a long put and a short risk-free bond position
D)a long stock and a short risk-free bond position
E)none of the above

Question 17

What is the minimum profit from the transaction described in Question 6 if the position is held to expiration?

A)-$2,711
B)-$3,289
C)-$3,000
D)negative infinity
E)none of the above

Question 18

Which of the following transactions does not profit in a strong bull market.

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

Question 19

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?

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

Question 20

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

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 21

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.

Question 22

Which of the following statements about a covered call writing strategy is true?

A)the losses are limited
B)return and risk are greater than that of simply holding the stock
C)it is a cheaper form of insurance than a protective put
D)it generally makes a large number of small profits
E)none of the above

Question 23

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.

Question 24

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

Question 25

Buying a put is the mirror image of buying a call.

Question 26

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

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

Question 27

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

Question 28

Given two bearish investors,the more risk averse investor would tend to select a put with a higher exercise price.

Question 29

A protective put can be profitable during a bull market,while a covered call is profitable only in a bear market.

Question 30

Which of the following investors may be obligated to buy stock?

A)covered call writer
B)call buyer
C)put writer
D)protective put buyer
E)none of the above

Question 31

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

Question 32

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

Question 33

Buying a call with a lower exercise price offers a greater profit potential than one with a higher exercise price.

Question 34

The difference in profit from an actual put and a synthetic put is

A)X
B)S_T - X
C)X - S_T
D)S_T + X(1 + r)^-T
E)none of the above

Question 35

The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

Question 36

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

Question 37

A covered call writer who prefers even less risk should

A)get rid of the call
B)switch to a call with a lower exercise price
C)get rid of the stock
D)switch to a call with a higher exercise price
E)none of the above

Question 38

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

Question 39

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

Question 40

The maximum loss on a call purchase is the premium on the call.

Question 41

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

Question 42

To reach breakeven on a call purchase held to expiration,the stock price must exceed the exercise price by at least the amount of the call premium.

Question 43

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

Question 44

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

Question 45

The breakeven for a protective put is the same as that for a covered call.

Question 46

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

Question 47

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

Question 48

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.

Question 49

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

Question 50

A protective put provides the same type of profit diagram as a long call.