Question 1

A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net loss (after the cost of the options is taken into account)?
A) $100
B) $200
C) $300
D) $400

Accepted Answer

The butterfly spread involves buying 100 options with strike prices $60 and $70 and selling 200 options with strike price $65.The maximum loss is when the stock price is less than $60 or greater than $70.The total payoff is then zero.The cost of setting up the butterfly spread is 11×100+18×100−14×200 = $100.The loss is therefore $100.

Question 2

How can a straddle be created?
A) Buy one call and one put with the same strike price and same expiration date
B) Buy one call and one put with different strike prices and same expiration date
C) Buy one call and two puts with the same strike price and expiration date
D) Buy two calls and one put with the same strike price and expiration date

Accepted Answer

A straddle consists of one call and one put where the strike price and time to maturity are the same.It has a V-shaped payoff.

Question 3

Which of the following creates a bear spread?
A) Buy a low strike price put and sell a high strike price put
B) Buy a high strike price put and sell a low strike price put
C) Buy a high strike price call and sell a low strike price put
D) Buy a high strike price put and sell a low strike price call

Accepted Answer

A bear spread is created by buying a high strike call and selling a low strike call.Alternatively,it can be created by buying a high strike put and selling a low strike put.

Question 4

Which of the following creates a bull spread?
A) Buy a low strike price put and sell a high strike price put
B) Buy a high strike price put and sell a low strike price put
C) Buy a high strike price call and sell a low strike price put
D) Buy a high strike price put and sell a low strike price call

Accepted Answer

A bull spread is created by buying a low strike price option while simultaneously selling a high strike price option with the same expiration date. This results in a net debit to the trader's account but limits risk while also capping any potential profits. In this case, buying a low strike price put and selling a high strike price put creates a bull spread.

Question 5

How can a strap trading strategy be created?
A) Buy one call and one put with the same strike price and same expiration date
B) Buy one call and one put with different strike prices and same expiration date
C) Buy one call and two puts with the same strike price and expiration date
D) Buy two calls and one put with the same strike price and expiration date

Accepted Answer

A strap consists of two calls and one put with the same strike price and time to maturity.

Question 6

Which of the following is true of a box spread?
A) It is a package consisting of a bull spread and a bear spread
B) It involves two call options and two put options
C) It has a known value at maturity
D) All of the above

Accepted Answer

A box spread consists of a long call spread and a short put spread or vice versa, which involves two call options and two put options. It has a known value at maturity, as the gains from the long leg of the spread will offset the losses from the short leg, resulting in a maximum payout that is predetermined. Therefore, all of the options (A, B, and C) are correct.

Question 7

Which of the following creates a bear spread?
A) Buy a low strike price call and sell a high strike price call
B) Buy a high strike price call and sell a low strike price call
C) Buy a low strike price call and sell a high strike price put
D) Buy a low strike price put and sell a high strike price call

Accepted Answer

A bear spread is created by buying a high strike call and selling a low strike call.Alternatively,it can be created by buying a high strike put and selling a low strike put.

Question 8

A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?
A) $100
B) $200
C) $300
D) $400

Accepted Answer

The butterfly spread involves buying 100 options with strike prices $60 and $70 and selling 200 options with strike price $65.The maximum gain is when the stock price equals the middle strike price,$65.The payoffs from the options are then,$500,0,and 0,respectively.The total payoff is $500.The cost of setting up the butterfly spread is 11×100+18×100−14×200 = $100.The gain is 500−100 or $400.

Question 9

Which of the following describes a protective put?
A) A long put option on a stock plus a long position in the stock
B) A long put option on a stock plus a short position in the stock
C) A short put option on a stock plus a short call option on the stock
D) A short put option on a stock plus a long position in the stock

Accepted Answer

A protective put is a strategy where an investor holds a long position in a stock and purchases a long put option on the same stock. This allows the investor to limit potential losses on the stock position should the stock price fall, as the long put option will gain in value as the stock price decreases.

Question 10

When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal protected note?
A) A one-year zero-coupon bond plus a one-year call option worth about $59
B) A one-year zero-coupon bond plus a one-year call option worth about $49
C) A one-year zero-coupon bond plus a one-year call option worth about $39
D) A one-year zero-coupon bond plus a one-year call option worth about $29

Accepted Answer

To create a principal protected note, we need to buy a zero-coupon bond and a call option. The strike price of the call option should be equal to the face value of the zero-coupon bond. The cost of the call option should be such that the total cost of the bond and the option is equal to the principal amount. Let P be the principal amount, r be the interest rate, and t be the time period. Then the cost of the zero-coupon bond is P*e^(-rt), and the cost of the call option is P - P*e^(-rt), which simplifies to P*(1 - e^(-rt)). Substituting r = 5% and t = 1 year, we get the cost of the bond as 1000*e^(-0.05*1) = 951.23, and the cost of the option as 1000*(1 - e^(-0.05*1)) = 48.77. The closest option to this value is B, with a cost of about $49.

Question 11

A stock price is currently $23. A reverse (i.e short) butterfly spread is created from options with strike prices of $20, $25, and $30. Which of the following is true?
A) The gain when the stock price is greater that $30 is less than the gain when the stock price is less than $20
B) The gain when the stock price is greater that $30 is greater than the gain when the stock price is less than $20
C) The gain when the stock price is greater that $30 is the same as the gain when the stock price is less than $20
D) It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20

Accepted Answer

The gain from a very high stock price or a very low stock price is the same.Suppose calls are used.In the case of a very low stock price none are exercised and the gain is c₁+c₃−2c₂ from the option premium.In the case of a very high stock price all options are exercised.The net payoff is zero and the gain is the same.

Question 12

Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?
A) $100
B) $200
C) $300
D) $400

Accepted Answer

The bull spread involves buying 100 calls with strike $35 and selling 100 calls with strike price $40.The cost is 6×100−4×100=$200.The maximum payoff (when the stock price is greater than or equal to $40)is $500.The maximum gain is therefore 500 −200 = $300.

Question 13

How can a strip trading strategy be created?
A) Buy one call and one put with the same strike price and same expiration date
B) Buy one call and one put with different strike prices and same expiration date
C) Buy one call and two puts with the same strike price and expiration date
D) Buy two calls and one put with the same strike price and expiration date

Accepted Answer

A strip consists of one call and two puts with the same strike price and time to maturity.

Question 14

Which of the following is correct?
A) A calendar spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different
B) A calendar spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different
C) A calendar spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different
D) A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different

Accepted Answer

A calendar spread is created by buying a call and selling a call with the same strike price but different expiration dates. This is a time spread strategy that profits from the difference in time decay between the two options. Buying the longer-dated call option while selling the shorter-dated call option reduces the cost of the longer-dated option and can potentially increase profits if the stock price remains relatively stable. Options with different strike prices do not create a calendar spread.

Question 15

What is the number of different option series used in creating a butterfly spread?
A) 1
B) 2
C) 3
D) 4

Accepted Answer

Three different options all with the same maturity are involved in creating a butterfly spread.The strike prices are usually equally spaced.The creator buys the low strike option,buys the high strike option,and sells two of the intermediate strike option

Question 16

Which of the following is correct?
A) A diagonal spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different
B) A diagonal spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different
C) A diagonal spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different
D) A diagonal spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different

Accepted Answer

Both the strike prices and times to maturity are different in a diagonal spread.

Question 17

Which of the following creates a bull spread?
A) Buy a low strike price call and sell a high strike price call
B) Buy a high strike price call and sell a low strike price call
C) Buy a low strike price call and sell a high strike price put
D) Buy a low strike price put and sell a high strike price call

Accepted Answer

A bull spread involves buying a call option with a lower strike price and selling a call option with a higher strike price. This strategy profits from a bullish price movement in the underlying asset. Choice B creates a bear spread, while choices C and D create different types of option strategies.

Question 18

What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option, where both options have a strike price of $100 and the underlying stock price is $75?
A) Neutral Calendar Spread
B) Bullish Calendar Spread
C) Bearish Calendar Spread
D) None of the above

Accepted Answer

This is a Bullish Calendar Spread. The investor is selling a call option with a closer expiration date (3 months) and buying a call option with a further expiration date (1 year), indicating a bullish outlook for the stock. By selling the 3-month call option, the investor collects premium income, while the longer-term call option provides upside potential if the stock price increases. The fact that both options have a strike price of $100 that is higher than the current stock price of $75 suggest that the investor is bullish on the stock.

Question 19

How can a strangle trading strategy be created?
A) Buy one call and one put with the same strike price and same expiration date
B) Buy one call and one put with different strike prices and same expiration date
C) Buy one call and two puts with the same strike price and expiration date
D) Buy two calls and one put with the same strike price and expiration date

Accepted Answer

A strangle trading strategy involves buying both a call option and a put option with the same expiration date, but at different strike prices. This allows for potential profit if the underlying stock experiences significant price movement in either direction. Option A described a strategy called a "long straddle," while options C and D involve buying additional options that do not fit the definition of a strangle strategy.

Question 20

Which of the following describes a covered call?
A) A long call option on a stock plus a long position in the stock
B) A long call option on a stock plus a short put option on the stock
C) A short call option on a stock plus a short position in the stock
D) A short call option on a stock plus a long position in the stock

Accepted Answer

A covered call involves holding a long position in a stock and selling a call option on that same stock. This generates income from the premium received for selling the call option while also capping the potential profit from the long stock position if the stock price rises above the strike price of the call option. Choice D describes this strategy.

Quiz 11: Trading Strategies Involving Options

A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net loss (after the cost of the options is taken into account) ?

How can a straddle be created?

Which of the following creates a bear spread?

Which of the following creates a bull spread?

How can a strap trading strategy be created?

Which of the following is true of a box spread?

Which of the following creates a bear spread?

A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account) ?

Which of the following describes a protective put?

When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal protected note?

A stock price is currently $23. A reverse (i.e short) butterfly spread is created from options with strike prices of $20, $25, and $30. Which of the following is true?

Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?

How can a strip trading strategy be created?

Which of the following is correct?

What is the number of different option series used in creating a butterfly spread?

Which of the following is correct?

Which of the following creates a bull spread?

What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option, where both options have a strike price of $100 and the underlying stock price is $75?

How can a strangle trading strategy be created?

Which of the following describes a covered call?