Question 1

Answer questions about a long straddle constructed using the June 50 options.
-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

Accepted Answer

The question does not provide enough information to calculate the profit, such as the initial stock price, the number of shares, or whether options or other derivatives are involved.

Question 2

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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-What is the maximum profit on the spread?
A)$500
B)$802
C)$198
D)$302
E)none of the above

Accepted Answer

C

Question 3

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

Accepted Answer

A

Question 4

Answer questions about a long straddle constructed using the June 50 options.
-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

Accepted Answer

The answer of Answer questions about a long straddle constructed...

Question 5

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.
-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

Accepted Answer

To calculate profit, we first need to calculate the cost of the stock purchase.

The option cost is the premium of $3.50 multiplied by the 100 shares in the contract for a total of $350.

To exercise the option at $50.00 per share, the total cost of the stock purchase would be $5,000.

If the stock price at expiration is $52.50, the option holder can exercise the option and purchase the stock for $50.00 per share, which can then be sold for $52.50 per share.

The profit per share is $52.50 - $50.00 = $2.50.

The total profit from the contract is the profit per share multiplied by the number of shares in the contract:

$2.50 x 100 shares = $250

The profit of $250 must be reduced by the premium paid for the option:

$250 - $350 = -$100

Since the profit is negative, there is actually a loss of $100 in this scenario.

Question 6

Answer questions about a long box spread using the June 50 and 55 options.
-What is the cost of the box spread?
A)$500
B)$2,018
C)$76
D)$484
E)none of the above

Accepted Answer

The cost of the box spread can be calculated as the difference between the two strikes (8-6=2) minus the premium received for the bull call spread ($2*2=$4), multiplied by the number of shares represented by the options (100). Therefore, the cost of the box spread is $200 - $16 = $184. The closest answer option is D ($484), which is significantly overpriced. Therefore, the best choice is D.

Question 7

Answer questions about a long straddle constructed using the June 50 options.
-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

Accepted Answer

The answer of Answer questions about a long straddle constructed...

Question 8

Answer questions about a long straddle constructed using the June 50 options.
-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

Accepted Answer

The answer of Answer questions about a long straddle constructed...

Question 9

Answer questions about a long straddle constructed using the June 50 options.
-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

Accepted Answer

The answer of Answer questions about a long straddle constructed...

Question 10

Answer questions about a long straddle constructed using the June 50 options.
-What will the straddle cost?
A)$145
B)$690
C)$971
D)$413
E)none of the above

Accepted Answer

In a long straddle, both a call and a put option with the same strike price and expiration date are purchased. In this case, we are using the June 50 options.

To calculate the cost of the straddle, we need to add the cost of the call option and the put option. Looking at option prices, we see that the June 50 call is priced at $9.50 and the June 50 put is priced at $4.21.

Adding those together, we get a total cost of $9.50 + $4.21 = $13.71 per share.

Since each option contract represents 100 shares of the underlying asset, the total cost of the straddle is 100 * $13.71 = $1,371.

Therefore, the correct answer is C.

As for the best choice, it depends on the investor's expectations for the underlying asset. A long straddle is generally used when an investor expects a significant price movement in either direction, but is not sure which way the price will go. By buying both a call and a put option, the investor can profit if the price moves significantly up or down.

If the investor is confident that the price will move significantly in one direction, they may be better off using a different strategy such as a long call or a long put. If the investor believes that the price will not move much, they may be better off using a different strategy such as a short straddle or a short iron butterfly.

Overall, the best choice for using a long straddle with June 50 options depends on the investor's expectations for the underlying asset and their risk tolerance.

Question 11

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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-What is the breakeven point?
A)$48.02
B)$41.98
C)$55.66
D)$50.00
E)none of the above

Accepted Answer

The answer of The following prices are available for call...

Question 12

Answer questions 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.
-What will the spread cost?
A)-$176
B)$176
C)$558
D)$105
E)none of the above

Accepted Answer

In a calendar spread, the cost is determined by taking the price of the June 50 call and subtracting the price of the March 50 call. Assuming both options are at-the-money with a price of $2.80 each, the cost would be $2.80 - $2.04, which equals $0.76 per share. Since each contract represents 100 shares, the total cost of one June/March 50 call spread would be $76. Therefore, the correct answer is B.

The best choice in this scenario would depend on the individual's investment strategy and market outlook. The June/March 50 call spread is a neutral to slightly bullish strategy, as it makes a profit if the stock price stays relatively stable or increases slightly. If an investor expects the stock price to remain constant or increase slightly, then the calendar spread could be a good choice. However, if an investor has a bearish outlook and expects the stock price to decrease, then a different strategy may be more appropriate. Ultimately, the best choice would depend on the individual's investment goals, risk tolerance, and market outlook.

Question 13

Answer questions 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.
-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

Accepted Answer

The answer of Answer questions about a calendar spread based...

Question 14

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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-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

Accepted Answer

To calculate the profit, we need to find the cost of the spread and the payoff at expiration. 
The cost of the spread is the difference between the premium paid for the 45 call and the premium received for the 50 call: 
Cost of spread = $4 - $1.5 = $2.5 
If the stock price at expiration is $47, the 45 call will be worth $2 (i.e. the intrinsic value) and the 50 call will be worthless. 
The payoff at expiration is therefore: 
Payoff = (47 - 45) - $2.5 = $-0.5 
So the profit is -$0.5 * 100 = -$50. 
Therefore, the answer is A) -$102.

Question 15

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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-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.

Accepted Answer

The answer of The following prices are available for call...

Question 16

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 (100 options) 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

Accepted Answer

To calculate the cost of the spread, we need to subtract the price of the lower strike call from the price of the higher strike call. In this case, the cost of the spread is $3 ($8 - $5). Since each option contract represents 100 options, the total cost of the spread would be $300. Therefore, the correct answer is B.

Question 17

Answer questions about a long box spread using the June 50 and 55 options.
-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

Accepted Answer

The box spread involves buying a call option and selling a put option at one strike price while simultaneously selling a call option and buying a put option at a higher strike price, all with the same expiration date. This strategy is designed to result in a riskless profit equal to the difference in strike prices minus the initial cost of entering the positions. In this scenario, the initial cost is $118.16, and the difference in strike prices is $120.

Therefore, the net present value of the box spread is ($120 - $118.16) = $1.84. Choice D is the correct answer.

Question 18

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 (100 options) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
-What is the maximum loss on the spread?
A)$500
B)$698
C)$198
D)$802
E)none of the above

Accepted Answer

The maximum loss on a spread cannot be determined without specific information about the type of spread (e.g., call spread, put spread), the strike prices, the premiums paid or received, and whether it's a debit or credit spread. Since none of this information is provided, the correct answer must be "none of the above."

Question 19

Answer questions about a long box spread using the June 50 and 55 options.
-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

Accepted Answer

If the stock price at expiration is $52.50, both the June 50 call and put options will be in the money and will have intrinsic value of $2.50 each. The June 55 call and put options will expire worthless. Therefore, the total profit from this long box spread will be ($2.50 + $2.50) - ($0 + $0) = $5. Subtracted from the initial cost of the spread at $21, the net profit will be $16.

Answer: A

Question 20

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.
-What will be the cost of the butterfly spread?
A)$1,195
B)$637
C)$79
D)$1,045
E)none of the above

Accepted Answer

The answer of suppose an investor expects the stock price...

Quiz 7: Advanced Option Strategies

Answer questions about a long straddle constructed using the June 50 options. -What is the profit if the stock price at expiration is at $64.75?

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?

Answer questions about a long straddle constructed using the June 50 options. -What is the profit if the position is held for 90 days and the stock price is $55?

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. -What will be the profit if the stock price at expiration is $52.50?

Answer questions about a long box spread using the June 50 and 55 options. -What is the cost of the box spread?

Answer questions about a long straddle constructed using the June 50 options. -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?

Answer questions about a long straddle constructed using the June 50 options. -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.

Answer questions about a long straddle constructed using the June 50 options. -What are the two breakeven stock prices at expiration?

Answer questions about a long straddle constructed using the June 50 options. -What will the straddle cost?

Answer questions 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. -What will the spread cost?

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

Answer questions about a long box spread using the June 50 and 55 options. -What is the net present value of the box spread?

Answer questions about a long box spread using the June 50 and 55 options. -What is the profit if the stock price at expiration is $52.50?

suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. -What will be the cost of the butterfly spread?