Options

Question 1

What is the breakeven for puts

Answer 1

Strike price - premium

Question 2

What is the breakeven for calls

Answer 2

Strike price + premium

Question 3

A straddle is established with either the purchase of ____ a call and a put or the sale of _____ a call and a put

Answer 3

A straddle is established with either the purchase of both a call and a put or the sale of both a call and a put

Question 4

Each individual option position of a straddle is referred to as a ____ of the straddle

Answer 4

Each individual option position of a straddle is referred to as a Leg of the straddle

Question 5

An investor buys 1 ABC May 60 call at a premium of 3. The investor also buys 1 ABC May 60 put at a premium of 2.

What is the investor’s BE ?

Answer 5

1st. Determine the total premium

3 + 2 = 5 ($500)

So, the calls BE = 65 and the puts BE = 55

Question 6

What is a combination?

Answer 6

A combination is simply a straddle position with contracts that have different exercise prices and/or different expiration months

Ex:

BUY 5 DEF March 50 Calls at 3
BUY 5 DEF March 40 Puts at 1

Question 7

is an options strategy that involves buying a call option and a put option at the same strike price and expiry date. This is typically used when an investor believes there will be a significant move in the price of the underlying asset, but isn’t sure in which direction.

Answer 7

A straddle

• Long Straddle: Buying both a call and a put option. This strategy profits if the underlying asset’s price moves significantly in either direction.
• Short Straddle: Selling both a call and a put option. This strategy profits if the underlying asset’s price doesn’t move much.

Question 8

is a general term for any option strategy that involves both call and put options.

Answer 8

A combination

Straddles, strangles, and risk reversals are examples of combination strategies.

Strangle: Similar to a straddle but buys or sells options at different strike prices. The call strike is above, and the put strike is below, the current price of the underlying asset. This is typically used when the trader expects a large price move but is uncertain of the direction.
Risk Reversal: This involves buying a call option and selling a put option (or vice versa). This is typically used when an investor has a strong directional view on the asset.