Deck 8: Options: Payoffs Trading Strategies

Question 1

The three-month 90-strike call is priced at $5 and the three-month 100-strike call is priced at $3. What is the maximum possible net payoff on a bullish vertical spread using these options?
(a) $5
(b) $7
(c) $8
(d) $10

Answer 1

C.

Question 2

Consider a position in a long straddle at strike 90 and a short straddle at strike 100, both for the same maturity. which of the following properties is valid for this position?
(a) The payoff is increasing in the stock price.
(b) The payoff is always positive.
(c) The payoff is always negative.
(d) The payoff is unbounded.

Answer 2

A

Question 3

If you go short a covered call and buy a protective put portfolio on a given stock (with the options having the same strike and maturity), what you have is
(a) A long position in a straddle.
(b) Insensitive to the stock price at maturity of the options.
(c) Positive cashflow at inception.
(d) All of the above.

Answer 3

A

Question 4

The 90-, 100-, and 110-strike calls are trading at $12, $5, $3, respectively. The stock price is at $100. What is the maximum net payoff on a short butterfly spread using these options?

A) $- \$ 5$
B) $\$ 0$
C) $\$ 5$
D) $\$ 10$

Question 5

Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } > K _ { 1 }$ . The current stock price is at $K _ { 1 }$ . The market view for this trade is most likely to be:

A) That the stock is more likely to fall in price than rise in price.
B) That volatility of the stock is likely to rise.
C) That the stock is likely to experience high levels of positive skewness in returns.
D) That the stock will rise but not by an indefinite amount.

Question 6

The combination of a position in a covered call and a position in a protective put on a stock index (where the options have the same strike and maturity) is similar to:
(a) A leveraged long position in the stock.
(b) A leveraged short position in the stock.
(c) A long position in a balanced index fund (i.e., long stock and long investment at the risk-free rate).
(d) A short position in a balanced index fund. (i.e., short stock and borrowing at the risk-free rate).

Question 7

Consider a long position in a 100-strike straddle added to a short position in a 90/110-strike strangle. The underlying is a stock index. This is equivalent to:

A) A stock index contract that pays the absolute return on the index up to $\pm 10 \%$ and then pays nothing if the return is outside the range $\pm 10 \%$ .
B) A long position in a 90-strike straddle plus a long position in a 110-strike straddle plus a short position in a 100-strike straddle.
C) A short position in a 90-100-110-strike butterfly call spread plus a zero-coupon bond of face value 10.
D) A long position in a 90-100-110-strike butterfly call spread plus a long put at 90 and long call at 110.

Question 8

You anticipate a recession with increased stock volatility and greater negative skewness in stock prices. Which of the following option positions would be most consistent with your view?
(a) A straddle.
(b) A strip.
(c) A strap.
(d) A vanilla put.

Question 9

A stock is currently trading at $50. A one-year at-the-money put costs $10. The stock price at the end of one year can be equally likely to be one of the following three values: {20, 50, 80}. What is the expected one-year return of a protective put portfolio?

A) $- 16.67 \%$
B) $0 \%$
C) $+ 16.67 \%$
D) $+ 50 \%$

Question 10

Suppose your portfolio consists of one share of Goldman Sachs (GS) and a European put option on GS with a strike of $105 and a maturity of a year. At maturity, the value of your portfolio must be
(a) Equal to or less than $105
(b) Equal to $105
(c) Equal to or greater than $105
(d) None of the above

Question 11

If you are interested in creating a retirement portfolio where the downside is protected and you retain at least some upside, the following portfolio will be consistent with your goal:
(a) A long stock position plus a long collar position.
(b) A short position in a protective put structure.
(c) A long position in a covered call structure.
(d) A short collar.

Question 12

In a covered call strategy:
(a) The gross payoff is greater than the net payoff.
(b) The gross payoff is equal to the net payoff.
(c) The gross payoff is smaller than the net payoff.
(d) None of the above is always true.

Question 13

Consider a condor made up of calls at strikes 90, 95, 100, 105, and a butterfly call spread at strikes 90, 97.5, 105. Which of the following statements is valid?
(a) A condor is worth less than the butterfly spread irrespective of the level of the stock price.
(b) A condor is worth more than the butterfly spread irrespective of the level of the stock price.
(c) A condor is worth less than the butterfly spread when the stock price is less than 90.
(d) A condor is worth more than the butterfly spread when the stock price is greater than 105.

Question 14

A long position in a bearish 90/100 call spread plus a long position in a bullish 90/100 put spread for the same maturity is:
(a) An options strategy to short the stock.
(b) An options strategy to go long the stock.
(c) Always in-the-money at maturity.
(d) A sophisticated approach to borrowing money.

Question 15

What happens to the long position in a 90-100-110-strike call butterfly spread if all the calls are replaced with puts of identical strike and maturity?
(a) There is no change in the risks and cash flows of the original position.
(b) The new position is the same as holding a short position in the original call butterfly spread.
(c) The new position is the mirror image of the original one if you consider the x-axis as a mirror.
(d) The gross payoffs remain the same, but the net payoffs are different.

Question 16

The 90-, 100-, and 110-strike calls are trading at $12, $5, $3, respectively. The stock price is at $100. What is the maximum net payoff on a long butterfly spread using these options?

A) $- \$ 5$
B) $\$ 0$
C) $\$ 5$
D) $\$ 10$

Question 17

You are long an at-the-money straddle on a stock index. Which of the following statements is valid?
(a) Your position increases in value if, ceteris paribus, the index rises.
(b) Your position increases in value if, ceteris paribus, the index falls.
(c) Your position increases in value if, ceteris paribus, the volatility of the index rises.
(d) All of the above.

Question 18

The three-month 90-strike put is priced at $2 and the three-month 100-strike put is priced at $7. What is the maximum possible net payoff on a bearish vertical spread using these options?
(a) $5
(b) $7
(c) $8
(d) $10

Question 19

A long position in a strangle is:
(a) A short squeeze on a straddle.
(b) Worth more than a straddle whose strike lies within that of the strangle.
(c) Worth less than a straddle whose strike lies within that of the strangle.
(d) A choke hold on someone else's throat.

Question 20

A combination of a long position in a strip and a long position in a strap for the same strike and maturity (and with similar but opposite proportions of calls and puts) is similar to:
(a) A strangle position.
(b) A straddle position.
(c) A collar position.
(d) None of the above.

Question 21

A stock is currently trading at a price of 22. You observe the following prices for European call options on the stock (the strikes are in parentheses): $C ( 20 ) = 3.25$ , $C ( 22 ) = 1.95$ , and $C ( 24 ) = 0.40$ . You can conclude from this that

A) The 20-strike call is overvalued.
B) The 24-strike call is undervalued.
C) The prices of the calls are inconsistent with no-arbitrage.
D) The stock is mispriced.

Question 22

The FTSE index is at 5,100. You are short a straddle on the FTSE 100. struck at 5,100 and long a 5,000/5,200 strangle. You are also short a 5,000-5,100-5,200 butterfly. Ceteris paribus, an increase in the level of the FTSE
(a) Increases the value of your portfolio.
(b) Has no effect on the value of your portfolio.
(c) Decreases the value of your portfolio.
(d) Any of the above is possible.

Question 23

Suppose you are short a call and long a put on the S&P 500 index with the same strike and same maturity. Then, you are essentially holding
(a) A long forward on the S&P 500 index
(b) A long straddle on the S&P 500 index
(c) A short forward on the S&P 500 index
(d) A short straddle on the S&P 500 index

Question 24

The FTSE index is at 5,100. You are short a straddle on the FTSE 100 struck at 5,100 and long a 5,000/5,200 strangle. If volatility were to increase,
(a) The value of your position would increase.
(b) The value of your position would be unaffected.
(c) The value of your position would decrease.
(d) Any of the above is possible.

Question 25

A stock is currently trading at a price of 22. You observe the following prices for European put options on the stock (the strikes are in parentheses): $C ( 20 ) = 3.35$ and $C ( 22 ) = 1.95$ . Given this information, you can conclude that the minimum price of the 24-strike call consistent with no-arbitrage is

A) 0.00.
B) 0.55.
C) 1.40.
D) 2.00.