Chapter 14

Question 1

Straddles

Answer 1

Either the purchase of both a call and a put or the sale of both a call and a put

• the same underlying security, exercise price and expiration date
• buyer expects price to be volatile
• seller expects price to be stable

Question 2

Combinations

Answer 2

A straddle position with contracts that have different exercise prices and/or different expiration months

Question 3

Spreads

Answer 3

• The simultaneous sale and purchase of two calls, or two puts, on the same underlying security
• The expiration months and/or strike prices will be different

Question 4

Price Spread

Answer 4

Same expiration month, different strike price

-also called dollar or vertical spread

Question 5

Time Spread

Answer 5

Same strike price, but different expiration months

-also called calendar, date, or horizontal spread

Question 6

Diagonal Spread

Answer 6

different strike prices and different expiration months

Question 7

When there is no premium shown, how do you find the dominant leg on a call spread?

Answer 7

Lower strike price

Question 8

When there is no premium shown, how do you find the dominant leg on a put spread?

Answer 8

Higher strike price

Question 9

Straddle

Answer 9

The purchase of both a call and a put or the sale of both a call and a put
-Same underlying security, exercise price, and expiration date

Question 10

Combinations

Answer 10

A straddle position with contracts that have different exercise price and/or different expiration months

Question 11

What is the purpose of writing call against securities already owned?

Answer 11

To increase the overall rate of the portfolio

Question 12

How do you protect stock in a volatile market when long stock?

Answer 12

Buy a put

Question 13

How do you protect stock in a volatile market when short stock?

Answer 13

Buy a call

Question 14

How do you add income in a stable market when long a covered stock?

Answer 14

Sell a call

Question 15

How do you add income in a stable market when short a covered stock?

Answer 15

Sell a put

Question 16

Long Straddles:

• Breakeven
• Strategy
• Max Gain
• Max Loss

Answer 16

• Breakeven: Strike price + and - total premium
• Strategy: Volatility
• Max Gain: Unlimited
• Max Loss: Total Premium

Question 17

Short Straddles:

• Breakeven
• Strategy
• Max Gain
• Max Loss

Answer 17

• Breakeven: Strike price + and - total premium
• Strategy: Stability
• Max Gain: Total Premium
• Max Loss: Unlimited

Question 18

Buying a Put to hedge a long stock position:

• Breakeven
• Strategy
• Max Gain
• Max Loss

Answer 18

• Breakeven: Cost of stock plus premium
• Strategy: Bullish
• Max Gain: Unlimited
• Max Loss: Cost of stock plus premium minus strike price (x100sh)

Question 19

Buying a call to hedge a short stock position:

• Breakeven
• Strategy
• Max Gain
• Max Loss

Answer 19

• Breakeven: Short sale proceed minus premium
• Strategy: Bearish
• Max Gain: Short sale proceed minus premium (x100 sh)
• Max Loss: Strike price + premium - short sale proceeds (x100sh)

Question 20

Diff between Straddle and Combination

Answer 20

Straddle:
-Same expiration months and same strike prices

Combination:
-Diff expiration months and/or diff strike prices

Question 21

How do you find the dominant leg when there is no premium?

Answer 21

For calls: Lower strike price

For puts: High strike price