Deck 11: Trading Strategies Involving Options

Question 1

The prices of a five-month call option and a put-option, with a strike price of $18, are $5 and $6 respectively. An investor is betting that there will be a big stock price move and considers that the stock price is more likely to increase than decrease. What combination should the investor take? What is the maximum loss in this strategy? _ _ _ _ _ _

Answer 1

A STRAP BY TAKING A LONG POSITION IN 2 CALLS AND 1 PUT, $16.

Question 2

A three-month call with a strike price of $25 costs $2. A three-month put with a strike price of $20 costs $3. A trader uses the options to create a strangle. For what two values of the stock price in three months does the trader break even with a profit of zero?
_ _ _ _ _ _ _ and _ _ _ _ _ _

Answer 2

$15 and $30

Question 3

Six-month call options with strike prices of $35 and $40 cost $6 and $4 respectively.
i) What is the maximum gain when a bull spread is created from the calls? _ _ _ _ _ _
ii) What is the maximum loss when a bull spread is created from the calls? _ _ _ _ _ _
iii) What is the maximum gain when a bear spread is created from the calls? _ _ _ _ _ _
iv) What is the maximum loss when a bear spread is created from the calls? _ _ _ _ _ _

Answer 3

i): $3
ii): $2
iii): $2
iv): $3

Question 4

Three-month European put options with strike prices of $50, $55 and $60 cost $2, $4 and $7 respectively.
i) What is the maximum gain when a butterfly spread is created from the put options? _ _ _ _ _ _
ii) What is the maximum loss when a butterfly spread is created from the put options? _ _ _ _ _ _
iii) For what two values of the stock price in three months does the holder of the butterfly spread break even with a profit of zero? _ _ _ _ _ _ _ and _ _ _ _ _ _ _

Question 5

Which of the following is true about writing a covered call? choose two)

A) It involves buying the stock and selling a call option on the stock.
B) It involves selling the stock and selling a call option on the stock.
C) It is equivalent to buying a put option plus borrowing a certain amount of cash.
D) It is equivalent to selling a put option plus borrowing a certain amount of cash.