Question 1

A spread that is profitable if the options are in-the-money is called a money spread.

Accepted Answer

A spread that is profitable if the options are in-the-money is typically referred to as a "debit spread" because it often involves paying a net premium upfront. The term "money spread" is not a standard term in options trading.

Question 2

Which of the following strategies does not profit in a rising market?

Accepted Answer

The answer of Which of the following strategies does not...

Question 3

A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.

Accepted Answer

A call money spread's profit or loss potential is determined by the difference between the strike prices and the premiums paid or received for the options involved, not by whether it is closed before expiration. Closing a position early can affect the profit or loss due to time value and market conditions, but it does not inherently result in lower losses and higher profits for each stock price compared to holding to expiration.

Question 4

Buying a put money spread is a bearish strategy.

Accepted Answer

This is because a put money spread involves buying a Put option at a higher strike price and selling a Put option at a lower strike price, and the goal is to profit from a drop in the underlying asset's price.

Question 5

Which of the following statements best describes the nature of option time value decay?

Accepted Answer

Option time value decay is the erosion of the price of an option over time due to the decreasing probability of the option moving in the favor of the holder. This decay is accelerated as the expiration date of the option approaches. Therefore, option time value decays more rapidly as expiration approaches.

Question 6

The option strategy where the holder of a long position in a stock buys a put with an exercise price lower than the current stock price and sells a call with an exercise price higher than the current stock price is known as

Accepted Answer

The option strategy described is a collar. It is commonly used to limit the potential downside risk of a long position in a stock by buying a put option and financing the cost by selling a call option. The put option provides protection against a decline in the stock price, while the call option helps to offset the cost of the put option.

Question 7

Which of the following is the best strategy for an expected fall in the market?

Accepted Answer

A long strip, which involves buying 2 puts and 1 call, is designed to profit from a significant move in the underlying asset's price, especially a downward move, making it a suitable strategy for an expected fall in the market.

Question 8

In a calendar spread the time value of the nearby option will decay more rapidly.

Accepted Answer

A calendar spread involves buying a longer-term option and selling a shorter-term option with the same strike price. Since the nearby option has less time until expiration, its time value will decay more rapidly than the longer-term option. This is one of the reasons why calendar spreads can be profitable if the underlying asset's price remains relatively stable, as the gain from the longer-term option can outweigh the loss from the nearby option.

Question 9

The profit from a put bear spread strategy when both options are out of the money is

Accepted Answer

A put bear spread involves buying a put option with a higher strike price and selling a put option with a lower strike price. If both options are out of the money at expiration, the trader's profit is the net premium received, which is the premium of the sold put minus the premium of the bought put.

Question 10

Early exercise is an important risk when call bear spreads and put bull spreads are used.

Accepted Answer

Early exercise means that the option holder exercises their option before the expiration date. This can be a risk for the option seller if the option is in-the-money as they may be forced to sell or buy the underlying asset earlier than expected. In the case of call bear spreads and put bull spreads, the option seller may be exposed to early exercise by the holder of the short position if the long position is in-the-money.

Question 11

A call butterfly spread combines a call bull spread with a call bear spread.

Accepted Answer

A call butterfly spread involves buying one call option at a lower strike price, selling two call options at a higher strike price, and buying another call option at an even higher strike price. This combination creates a limited risk, limited reward options strategy with a "body" at the lower strike price and "wings" at the higher strike prices, resembling the shape of a butterfly. The two call spreads involved are a bull call spread (buying the lower strike call and selling the higher strike calls) and a bear call spread (selling the higher strike calls and buying the even higher strike call).

Question 12

Which of the following transactions can have an unlimited loss?

Accepted Answer

The answer of Which of the following transactions can have...

Question 13

A call bear spread is a strategy for investors who expect stock prices to increase.

Accepted Answer

A call bear spread is a strategy for investors who expect stock prices to decrease.

Question 14

The purchase of one option and the sale of another is known as

Accepted Answer

The purchase of one option and the sale of another is a common strategy known as a spread. It can be used in both bullish and bearish market conditions, and can be tailored to the investor's risk tolerance and investment goals. The other options given in the question refer to specific strategies or combinations of options, but the generic term for buying and selling options at the same time is a spread.

Question 15

A call butterfly spread is a bullish strategy that is profitable if stock prices increase.

Accepted Answer

A call butterfly spread is a neutral strategy, not a bullish strategy. It involves buying two call options at a lower strike price, selling two call options at a higher strike price, and buying one call option at an even higher strike price. This strategy profits from a range-bound market and limited price movement.

Question 16

"Like the butterfly spread,the calendar spread is one in which the underlying instrument's ___________ is the major factor in its performance." The best word for the blank is which of the following?

Accepted Answer

The performance of a calendar spread is heavily influenced by the underlying instrument's volatility. This is because a calendar spread involves purchasing options with different expiration dates, and the options with longer expiration dates are more sensitive to changes in volatility. A higher volatility can increase the potential profitability of the spread.

Question 17

There are three breakeven stock prices in a butterfly spread.

Accepted Answer

A butterfly spread typically has two breakeven points, not three. This is because it involves a combination of four options contracts with three different strike prices.

Question 18

A reverse calendar spread is used to take advantage of unexpected high volatility.

Accepted Answer

A reverse calendar spread involves buying an option with a later expiration date and selling an option with an earlier expiration date, but with the same strike price. This strategy is used to profit from an increase in volatility, as it allows the trader to benefit from higher premium values on the shorter-term option while holding a cheaper long-term option to take advantage of any potential price movement.

Question 19

Which of the following have similar profit graphs?

Accepted Answer

The profit graphs of the options strategies listed do not match each other. Each strategy has a unique profit/loss graph based on the combination of options used, their strike prices, and expiration dates.

Question 20

Early exercise is a disadvantage in which of the following transactions?

Accepted Answer

In a short box spread, early exercise would result in forfeiting the time value of the options, reducing the potential profit from the transaction. Early exercise is generally not a disadvantage in put bear spreads, long strips, or long straps as they involve the purchase of options rather than the sale of options. Option buyers have the right, but not the obligation, to exercise the option, and they would only exercise if it was beneficial for them to do so.

Quiz 7: Advanced Option Strategies