Chapter 11 Crunch time

Question 1

provides a buyer the right to buy a futures contract at a preset price

Answer 1

calls

Question 2

obligates a seller to sell a futures contract at a preset price

Answer 2

calls

Question 3

provide a buyer with the right to sell a futures contract at a preset price

Answer 3

puts

Question 4

obligates a seller to buy a futures contract at a preset price

Answer 4

puts

Question 5

are in-the-money when the market is up above the strike price

Answer 5

calls

Question 6

are in-the-money when the market is down below the strike price

Answer 6

puts

Question 7

premium =

Answer 7

intrinsic value + time value

Question 8

An options intrinsic value is equivalent to…

Answer 8

its in-the-money amount

Question 9

When does an option have zero intrinsic value?

Answer 9

when it is at-the-money or out-the-money

Question 10

number based on the time left until expiration and the volatility of the underlying commodity

Answer 10

time value

Question 11

this number is set in the marketplace and is negotiated

Answer 11

premium

Question 12

Long straddle:

Answer 12

buy both a call and a put; investors would be seeking volatility

Question 13

Short straddle:

Answer 13

sell both a call and a put; investors seeking stability

Question 14

Bullish or Bearish?
debit call spread

Answer 14

bullish

Question 15

Bullish or Bearish?
credit call spread

Answer 15

bearish

Question 16

Bullish or Bearish?
debit put spread

Answer 16

bearish

Question 17

Bullish or Bearish?
credit put spread

Answer 17

bullish

Question 18

consists of two spreads, both call or put on the same commodity and the same expiration month where one is bullish and one is bearish

Answer 18

butterfly spread

Question 19

created by buying an option with a lower strike price, selling two options at the same strike price in the middle, and buying an option with a high strike price

Answer 19

butterfly spread

Question 20

For a butterfly spread, how is the maximum gain realized on the underlying commodity?

Answer 20

if the underlying commodity is at the strike price. a butterfly spread is profitable if the price remains stable (it has a neutral position)

Question 21

consists of two spreads, both call or put on the same commodity and the same expiration but with different strike prices

Answer 21

condor spread

Question 22

is a debit spread and profitable if the price remains stable (i.e. low volatility)

Answer 22

long condor spread

Question 23

is a credit spread and profitable if there’s high price volatility

Answer 23

short condor spread

Question 24

consists of selling two spreads, one is a call and one is a put on the same commodity and the same expiration month but with four different strike prices

Answer 24

iron condor spread

Question 25

What are the details of the iron condor spread?

Answer 25

• credit spread
• neutral strategy
• max profit is realized if all options expire

Question 26

For an iron condor spread, the maximum loss is limited but will be realized if…

Answer 26

the price of the underlying commodity moves significantly in one direction or the other (i.e., if there’s volatility).

Question 27

synthetic long call =

Answer 27

long put + long futures

Question 28

synthetic long put =

Answer 28

long call + short futures

Question 29

synthetic long futures =

Answer 29

long call + short put

Question 30

synthetic short futures =

Answer 30

long put + short call

Question 31

conversion =

Answer 31

long futures + long put + short call

Question 32

reversal =

Answer 32

short futures + long call + short put

Question 33

these types of options may only be exercised on the business day prior to expiration

Answer 33

European-style option contracts

Question 34

these types of options may be exercised at any time during their life

Answer 34

American-style option contracts

Question 35

An order must be time stamped within…

Answer 35

one minute of receipt by the FCM.