Deck 3: Insurance, Collars, and Other Strategies

Question 1

Which strategy is a bet that the actual volatility of an asset is low relative to the marketʹs assessment?

A) Long Call
B) Long Put
C) Purchased straddle
D) Written straddle

Answer 1

D

Question 2

What is the maximum profit that an investor can obtain from a strategy employing a long 830 call and a short 850 call over 6 months? Interest rates are 0.5% per month.

A) $6.80
B) $7.68
C) $9.24
D) $12.32

Answer 2

B

Question 3

Using option strategy concepts, what is the value of an insured home, if the value of the uninsured home is $220,000, the house was purchased for $180,000 and the house has a casualty policy costing $500 with a $2,000 deductible? Ignore interest costs.

A) $180,000
B) $217,500
C) $220,000
D) $222,500

Answer 3

B

Question 4

The difference between the strike prices of a purchased put and a written call is the .

A) Butterfly spread
B) Strangle
C) Ratio call write
D) Bull spread

Question 5

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month, compute the profit or loss from the long put position by itself (in 6 months) if the market index is $810.

A) $3.45 gain
B) $1.45 gain
C) $2.80 loss
D) $1.36 loss

Question 6

A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830. The put premium is $18.00 and the call premium is $44.00. Interest rates are 0.5% per month. What is the breakeven price of the market index for this strategy at expiration (in 6 months)?

A) $802.12
B) $830.00
C) $855.21
D) $866.32

Question 7

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month, compute the profit or loss from the long index position by itself expiration (in 6 months) if the market index is $810.

A) $45.21 loss
B) $21.22 loss
C) $18.00 gain
D) $24.25 gain

Question 8

A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830. The put premium is $18.00 and the call premium is $44.00. Interest rates are 0.5% per month. Determine the net profit or loss if the index price at expiration is $830 (in 6 months).

A) $0
B) $23.67 loss
C) $26.79 gain
D) $28.50 gain

Question 9

What is the break even point that an investor can obtain from a 6-month strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month.

A) $832.82
B) $842.32
C) $852.22
D) $862.92

Question 10

An investor purchases a call option with an exercise price of $55 for $2.60. The same investor sells a call on the same security with an exercise price of $60 for $1.40. At expiration, 3 months later, the stock price is $56.75. All other things being equal and given an annual interest rate of 4.0%, what is the net profit or loss to the investor?

A) $1.21 loss
B) $1.50 loss
C) $0.54 gain
D) $1.65 gain

Question 11

What strategy is an investor most likely to employ to insure against the losses associated with a straddle write?

A) Butterfly spread
B) Strangle
C) Ratio call write
D) Bull spread

Question 12

The owner of a house worth $180,000 purchases an insurance policy at the beginning of the year for a price of $1,000. The deductible on the policy is $5,000. If after 6 months the homeowner experiences a casualty loss valued at $45,000, what is the homeownerʹs net gain/loss? Assume an opportunity cost of capital of 4.0% annually.

A) $0
B) $1,000
C) $5,000
D) $6,020

Question 13

A position in which you buy a call and sell an otherwise identical call with a higher strike price is called a .

A) Butterfly spread
B) Strangle
C) Ratio call write
D) Bull spread

Question 14

What is the maximum loss that an investor can obtain over 6 months from a strategy employing a long 830 call and a short 850 call? Interest rates are 0.5% per month.

A) $6.80
B) $7.68
C) $9.24
D) $12.32

Question 15

The $850 strike put premium is $25.45 and the $850 strike call is selling for $30.51. Calculate the breakeven index price for a strategy employing a short call and long put that expires in 6 months. Interest rates are 0.5% per month.

A) $822.67
B) $824.79
C) $830.76
D) $875.82

Question 16

What strategy is an investor most likely to employ to reduce the high premium cost associated with a strangle strategy?

A) Butterfly spread
B) Strangle
C) Ratio call write
D) Bull spread

Question 17

Which of the following strategies represents a purchased put and a written call for which the premiums are equal?

A) Butterfly spread
B) Strangle
C) Ratio call write
D) Bull spread

Question 18

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month, what is the profit or loss at expiration (in 6 months) if the market index is $810?

A) $20.00 gain
B) $18.65 gain
C) $36.29 loss
D) $43.76 loss

Question 19

A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month, what is the estimated price of a call option with an exercise price of $830?

A) $42.47
B) $45.26
C) $47.67
D) $49.55

Question 20

At the 6-month point, what is the breakeven index price for a strategy of longing the market index at a price of 830? Interest rates are 0.5% per month.

A) $802.12
B) $830.00
C) $855.21
D) $866.32

Question 21

What is the difference between naked and covered call writing?

Question 22

What are the similarities and differences between bear and bull spreads?

Question 23

Explain how a long stock and long put strategy equals the cash flow from a long call strategy.

Question 24

Why might the manager of a portfolio employ a protective put strategy?

Question 25

Why is a straddle position considered a speculation on the assetʹs volatility?