Quiz 2 - Review

Question 0

Which of the following is most similar to buying a protective put?

A. writing a call
B.  buying a covered call
C.  buying a call
D.  writing a put

Answer 0

C. buying a call

Question 1

Which of the following is most similar to writing a covered call?

A.  buying a put.
B.  buying a straddle
C.  buying a call.
D.  writing a put.

Answer 1

D. Writing a put.

Question 2

An investor buys 100 shares of stock at $24 and buys one APR 20 put @ $2.00. At expiration the stock is worth $0. This person’s total loss is ______________.

Answer 2

$600

Protective put: So + Po - X
= (24 + 2 - 20) x 100
= 600

Question 3

An investor buys 100 shares of stock at $30 and sells one APR 35 call @ $2. At expiration the stock is worth $50. This person’s total gain is _____________.

Answer 3

$700

Covered call
= X - So + Co
= (35 - 30 + 2) x 100
= 700

Question 4

An investor buys 200 shares of stock at $24 and buys two DEC 20 puts @ 1. At expiration is the stock is worth $18. This person’s total loss is _______________.

Answer 4

$1000

Protective put
= (So + Po - X)
= (24 + 1 - 20) x 200
= 1000

Question 5

If stock is purchased at $29 and a $40 call is written for a premium at $1, the maximum possible gain per share is _________.

Answer 5

$12.00

= 40-29+1
= 12

Question 6

An investor sells a call and sells a put with the same strike price and expiration date, this is referred to as a _________________.

Answer 6

Short Straddle

Buy = long
Sell = short

Question 7

An investor buys one call with a strike price of $30 for $3 and sells one call with a strike price of $40 for $1. What is the maximum gain per share?

Answer 7

$8

= 10 - 3 + 1
= 8

Question 8

An investor buys one call with a strike price of $30 for $3 and sells one call with a strike price of $40 for $1. What is the net profit at expiration per share if the stock price is $35?

Answer 8

$3

= max(35-30) - (35-40) = 5 - 0 = 5
pi = 5 - 3 + 1 = 3

Question 9

An investor buys one call with a strike price of $30 for $3 and sells one call with a strike price of $40 for $1. What is the maximum loss on this trade?

Answer 9

$2

= max (0-30)-(0-40) = 0
pi = 0 - 3 + 1 = -2

Question 10

An investor sells one call with a strike price of $50 for $4 and sells one put with a strike price of $50 for $3.50. At expiration, the stock price is $57.50. The total net profit to this investor is ______.

Answer 10

$0

= -(57.50 - 50) = -7.50
pi = -7.50 + 4 = -3.50

= (50 - 57.50) = 0
pi = 0 + 3.50 = 3.50

Question 11

If an investor buys one call with a lower strike price and sells another call with a higher strike price, this is referred to as a _____________.

Answer 11

bull-spread

Question 12

Which of the following trades has the most risk, assuming the same underlying asset, strike price and maturity?

A.  covered call
B.  protective put
C.  long straddle
D.  short call

Answer 12

D. short call

Question 13

Which of the following trades has the least risk, assuming the same underlying asset, strike price and maturity?

A.  covered call
B.  protective put
C.  long straddle
D.  short call

Answer 13

B. protective put

Question 14

An investor buys two calls with a strike price of $50 for $3. At expiration, the stock price is $52. The total new profit to this investor is _______________.

Answer 14

$ - 200

= 2(52-50) = 4
pi = 4 - 2(3) = - 2 x 100
= -200

Question 15

An investor buys and sells the following calls on CSCO: sells 1 June 2013 call with $21 strike price for $0.70, buys 2 June 2013 calls with $22 strike price for $0.35, sells 1 June 2013 call with $23 strike price for $0.20. What is the net initial cash flow on this trade (per share)?

Answer 15

= $0.20

= 0.70 - 2(0.35) + 0.20
= 070 - 0.70 + 0.20
= 0.20

Question 16

An investor buys and sells the following calls on CSCO: sells 1 June 2013 call with $21 strike price for $0.70, buys 2 June 2013 calls with $22 strike price for $0.35, sells 1 June 2013 call with $23 strike price for $0.20. What type of trade is this?

A.  Long butterfly
B.  Short butterfly
C.  Long Straddle
D.  Short straddle

Answer 16

B. Short butterfly

Question 17

An investor buys and sells the following calls on CSCO: sells 1 June 2013 call with $21 strike price for $0.70, buys 2 June 2013 calls with $22 strike price for $0.35, sells 1 June 2013 call with $23 strike price for $0.20. What is the net profit of this trade (per share) if the stock price at expiration is $24?

Answer 17

= 0.20

Vt = Max(0, St-X1) - 2Max(0, St - X2) + Max(0, St - X3)
= (24-21) - 2(24-22) + (24 - 23)
= 3 - 4 + 1 = 0

pi = Vt - C1 + 2(C2) - C3
= 0 - 0.70 + 2(0.35) - 0.20
= -0.20

Question 18

An investor buys and sells the following calls on CSCO: sells 1 June 2013 call with $21 strike price for $0.70, buys 2 June 2013 calls with $22 strike price for $0.35, sells 1 June 2013 call with $23 strike price for $0.20. What is the net profit of this trade (per share) if the stock price at expiration is $22.50?

Answer 18

= 0.30

Vt = Max(0, St - X1) - 2(Max(0, St - X2)) + Max(0, St - X3)
= (22.50-21) - 2(22.50-22) + (22.50-23)
= 1.5 - 1 = 0.5

pi = 0.5 - 0.70 + 2(0.35) - 0.20
= 0.30

Question 19

An investor buys and sells the following calls on CSCO: sells 1 June 2013 call with $21 strike price for $0.70, buys 2 June 2013 calls with $22 strike price for $0.35, sells 1 June 2013 call with $23 strike price for $0.20. What are the break-even prices for this trade (per share)?

Answer 19

$21.20 and $22.80

St = X1 + C1 - 2(C2) + C3
= 21 + 0.70 - 2(0.35) + 0.20
= $21.20

St = 2(X2) - X1 - C1 + 2(C2) - C3
= 2(22) - 21- 0.70 + 2(0.35) - 0.20
= $22.80

Question 20

An investor buys and sells the following calls on CSCO: sells 1 June 2013 call with $21 strike price for $0.70, buys 2 June 2013 calls with $22 strike price for $0.35, sells 1 June 2013 call with $23 strike price for $0.20. What is the maximum gain on this trade (per share)?

Answer 20

$0.20

Question 21

An investor bought 100 shares of AAPL stock at $460 and sold one June 480 call for $14. The investor’s total maximum gain is equal to ______________.

Answer 21

$3400

covered call, max profit: X - (So + Co)
= 480-(460+14) x 100
= 3400

Question 22

An investor bought 100 shares of AAPL stock at $460 and sole one June $480 call for $14. This type of trade is called a:

A.  covered call
B.  protective put
C.  straddle
D.  naked call

Answer 22

A. covered call

Question 23

An investor bought a June $800 call and a June $800 put on GOOG for a total of $60. What are the break-even prices? What kind of trade is this?

Answer 23

$740 and $860
= 800 - 60 = $740 800 + 60 = $ 860

long straddle