Options Flashcards
What is the difference between naked writing and covered writing
Naked writing is when you are selling an option without ownership of the underlying asset. Covered writing is when you own that underlying asset
What is a floor?
It is the minimum selling price for a stock
= Stock + Put
What is a cap ?
It is the maximum purchasing price for a stock
=Call- Stock
What is a covered put?
= - floor
= - Stock - Put
What is a covered call?
= - cap
= -Call + Stock
Which of the following options is/are path-dependent?
Asian option Barrier option Gap option Compound option A I only
B
II only
C
I and II only
D
I, II, and III only
E
II, III, and IV only
C
I and II only
Asian and Barrier
Farmer Brown grows wheat, and will be selling his crop in 6 months.
The current price of wheat is 8.50 per bushel.
To reduce the risk of fluctuation in price, Brown wants to use derivatives with a 6-month expiration date to sell wheat between 8.60 and 8.80 per bushel. Brown also wants to minimize the cost of using derivatives.
The annual risk-free interest rate is 2% compounded continuously.
Which of the following strategies fulfills Farmer Brown’s objectives?
A
Short a forward contract
B
Long a call with strike 8.70 and short a put with strike 8.70
C
Long a call with strike 8.80 and short a put with strike 8.60
D
Long a put with strike 8.60
E
Long a put with strike 8.60 and short a call with strike 8.80
E
Long a put with strike 8.60 and short a call with strike 8.80
Determine which of the following statements is FALSE:
A
American options are worth at least as much as otherwise equivalent European options.
B
For a nondividend-paying stock, an American call option on the stock is worth the same as an otherwise equivalent European call option
C
For a nondividend-paying stock, an American put option on the stock may be worth more than an otherwise equivalent European put option.
D
It is not rational to early exercise an American call option on a dividend-paying stock.
E
It may be rational to early exercise an American put option on a dividend-paying stock.
D is false
It is not rational to early exercise a call option on a nondividend-paying stock.
A is true
American option is more flexible, so normally, american premium is more expenseibe
B is true
no benefit now, so no need to early exercise
And if it is not exercise early, it is equivalent to an European option. True for a CALL
C is true
If the stock is worth 0. The put if always in the money, exercise immediately to receive the strike price. So an American PUT >= to European PUT
E is true
