Derivative Profit, Loss and Payoffs

Question 1

For a Long futures buyer, what is the:
1) Profit
2) Loss

Answer 1

1) Unlimited
2) Floor price of underlying

Question 2

For a Long futures seller, what is the:
1) Profit
2) Loss

Answer 2

1) Strike Price - Spot Price at Expiry
2) Unlimited

Question 3

For a Long call holder, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 3

1) Unlimited
2) Premium
3) Bullish
4) Strike Price + Premium

Question 4

How is a long call implemented?

Answer 4

Purchase a call option
1) Very bullish = buy OTM
2) Less bullish = buy ATM

Question 5

For a Long put holder, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 5

1) Strike - Premium
2) Premium
3) Bearish
4) Strike Price - Premium

Question 6

How is a long put implemented?

Answer 6

Buy a long put

1) Very bearish - buy OTM
2) Less bearish - buy ATM

Question 7

For a Long call writer, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 7

1) Premium
2) Unlimited
3) Bearish
4) Strike Price + Premium

Question 8

How is a short call implemented?

Answer 8

Sell a call option

1) If very bearish sell ITM
2) If less bearish sell OTM

Question 9

For a Long put writer, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 9

1) Premium
2) Strike - Premium
3) Bullish
3) Strike - Premium

Question 10

For a Covered Call, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 10

1) Strike Price + Premium Received - Spot at Outset
2) Asset Price at outset - premium
3) Slightly Bullish / neutral
4) Initial Spot - Premium

Question 11

How do you institute a covered call?

Answer 11

1) Own the underlying
2) Sell a long call

Question 12

For a Covered Call, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 12

1) difference between initial spot and strike plus the premium
2) Initial spot - strike + premium
3) Moderately bullish with limited downside risk#
4) Initial Spot + Premium

Question 13

How do you institute a protective put?

Answer 13

Be long by owning the underlying - buy a put on the same underlying

Question 14

For a Bull Spread with Calls, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 14

1) Difference in strikes - net premium
2) Net Premium
3) Moderately bullish
4) Lower strike + net premium

Question 15

How do you institute a Bull Spread with Calls?

Answer 15

Go long a call at a lower strike e.g. 100

Go short a call at a higher strike e.g 110

Max profit when spot = strike

Question 16

For a Bull Spread with Puts, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 16

1) Net Premium
2) Difference in strikes - premium
3) Moderately bullish
4) Higher strike - premium

Question 17

How do you institute a Bull Spread with Puts?

Answer 17

Go long a put at a lower strike e.g. 100

Go short a put at a higher strike e.g 110

Question 18

Bull Spread = Buy ? Strike
Bear Spread = Buy ? Strike

Answer 18

Bull Spread = Buy Lower Strike
Bear Spread = Buy Higher Strike

Question 19

For a Bear Spread with Calls, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 19

1) Net Premium
2) Difference in Strikes - Premium
3) Moderately bearish
4) Lower Strike + Premium

Question 20

How do you institute a bear spread with calls?

Answer 20

Go long a higher strike call e.g. 110
Go short a lower strike call e.g. 100

Question 21

For a Bear Spread with Puts, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 21

1) Difference in Strikes - Net Premium Paid
2) Net Premium Paid
3) Slightly Bearish
4) Higher Strike - Net Premium

Question 22

How do you institute a bear spread with puts?

Answer 22

Go long a higher strike put (e.g. 110)

Sell a lower strike put (e.g. 100)

Question 23

For a Long Straddle, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 23

1) Unlimited
2) Premiums Paid
3) Expect volatility
4) Strike +- Premiums

Question 24

How do you implement a long straddle?

Answer 24

Purchase a long call and long put at the same strike price

Question 25

For a Short Straddle, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 25

1) Premiums Received
2) Unlimited
3) Expect declining volatility
4) Strike +- Premium

Short Straddles define a range that if the spot price remains within, the strategy is profitable (hence being short volatility)

Question 26

How do you implement a short straddle?

Answer 26

Sell a call and a put with same strike and expiry

Question 27

What do straddles suffer from?

Answer 27

Time decay

Question 28

Why would an investor choose a strangle over a straddle?

Answer 28

1) Less time decay
2) Less subject to early losses
3) expect greater volatility (long strangle)

However break evens are wider apart

Question 29

For a Long Strangle, what is the:
1) Profit
2) Loss
3) Motivation
4) Break-even

Answer 29

1) Unlimited
2) Premiums Paid
3) High Volatility
4) Strike +- Premiums

More volatility than a strangle

Question 30

How do you implement a long strangle?

Answer 30

Buy a call with a higher strike

Buy a put with a lower strike

Same expiry date

Question 31

What is the relationship between a futures price and its underlying?

Answer 31

Linear - 1% move in underlying = 1% move in future

Question 32

What are 5 of the inputs to the black scholes model?

Answer 32

1) Underlying Price
2) Implied Volatility
3) Short Term Interest Rates - call holders have extra cash from not buying security to invest
4) Time to Expiry
5) Strike Price

Also the yield of underlying - call holder loses out on not having it therefore makes put more valuable

Question 33

A higher strike price means a ? option is less valuable

Answer 33

a call option is less valuable with a high strike price