Chapter 9: Options Intermediate Test: Combinations

Question 1

An investor goes long 1 ABC JAN 60 call @ 4 and long 1 ABC JAN 70 put @ 5.
Just before expiration, ABC is trading at 66 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 1

Type: Long Combination

Calculations:
Total premium = 9
Call breakeven = 60 + 9 = 69
Put breakeven = 70 − 9 = 61
Max loss = $900
Max gain = unlimited

Intrinsic values at 66:
Call intrinsic = 66 − 60 = 6
Put intrinsic = 70 − 66 = 4

Close-out debit = (6 + 4) × 100 = $1,000
Opening debit = $900
Profit on closing = $100

Breakevens:
69 and 61

Profit/Loss on Closing:
+$100

Rationale:
Because the investor purchased both options with different strikes, this is a long combination. The maximum loss is the total premiums paid. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value. The difference between the intrinsic value received and the original debit determines the gain or loss.

Question 2

An investor goes long 1 XYZ APR 40 call @ 6 and long 1 XYZ APR 55 put @ 7.
Just before expiration, XYZ is trading at 48 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 2

Type: Long Combination

Calculations:
Total premium = 13
Call breakeven = 53
Put breakeven = 42
Max loss = $1,300
Max gain = unlimited

Intrinsic values at 48:
Call intrinsic = 48 − 40 = 8
Put intrinsic = 55 − 48 = 7

Close-out debit = (8 + 7) × 100 = $1,500
Opening debit = $1,300
Profit = $200

Breakevens:
53 and 42

Profit/Loss on Closing:
+$200

Rationale:
Because the investor purchased both options with different strikes, this is a long combination. The maximum loss is the premiums paid. The breakevens follow the Call UP and Put DOWN rule. At expiration, both contracts are closed at intrinsic value, and the difference between the intrinsic value received and the original debit determines the gain.

Question 3

An investor goes long 1 LMN OCT 90 call @ 8 and long 1 LMN OCT 110 put @ 9.
Just before expiration, LMN is trading at 105 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 3

Type: Long Combination

Calculations:
Total premium = 17
Call breakeven = 107
Put breakeven = 93
Max loss = $1,700
Max gain = unlimited

Intrinsic values at 105:
Call intrinsic = 105 − 90 = 15
Put intrinsic = 110 − 105 = 5

Close-out debit = (15 + 5) × 100 = $2,000
Opening debit = $1,700
Profit = $300

Breakevens:
107 and 93

Profit/Loss on Closing:
+$300

Rationale:
Because the investor purchased both options with different strikes, this is a long combination. The maximum loss is the premiums paid. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value received and the original debit determines the gain.

Question 4

An investor writes 1 RST DEC 50 call @ 5 and writes 1 RST DEC 70 put @ 8.
Just before expiration, RST is trading at 63 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 4

Type: Short Combination

Calculations:
Total credit = 13
Call breakeven = 63
Put breakeven = 57
Max gain = $1,300
Max loss = unlimited

Intrinsic values at 63:
Call intrinsic = 63 − 50 = 13
Put intrinsic = 70 − 63 = 7

Close-out debit = (13 + 7) × 100 = $2,000
Opening credit = $1,300
Loss = $700

Breakevens:
63 and 57

Profit/Loss on Closing:
–$700

Rationale:
Because the investor sold both options with different strikes, this is a short combination. The maximum gain is the credit received. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value paid and the original credit determines the loss.

Question 5

An investor writes 1 QED MAR 30 call @ 4 and writes 1 QED MAR 45 put @ 6.
Just before expiration, QED is trading at 38 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 5

Type: Short Combination

Calculations:
Total credit = 10
Call breakeven = 40
Put breakeven = 35
Max gain = $1,000
Max loss = unlimited

Intrinsic values at 38:
Call intrinsic = 38 − 30 = 8
Put intrinsic = 45 − 38 = 7

Close-out debit = (8 + 7) × 100 = $1,500
Opening credit = $1,000
Loss = $500

Breakevens:
40 and 35

Profit/Loss on Closing:
–$500

Rationale:
Because the investor sold both options with different strikes, this is a short combination. The maximum gain is the credit received. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value paid and the original credit determines the loss.

Question 6

An investor goes long 1 UVW JUN 120 call @ 9 and long 1 UVW JUN 140 put @ 10.
Just before expiration, UVW is trading at 132 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 6

Type: Long Combination

Calculations:
Total premium = 19
Call breakeven = 139
Put breakeven = 121
Max loss = $1,900
Max gain = unlimited

Intrinsic values at 132:
Call intrinsic = 132 − 120 = 12
Put intrinsic = 140 − 132 = 8

Close-out debit = (12 + 8) × 100 = $2,000
Opening debit = $1,900
Profit = $100

Breakevens:
139 and 121

Profit/Loss on Closing:
+$100

Rationale:
Because the investor purchased both options with different strikes, this is a long combination. The maximum loss is the premiums paid. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value received and the original debit determines the gain.

Question 7

An investor writes 1 TUV SEP 80 call @ 7 and writes 1 TUV SEP 100 put @ 9.
Just before expiration, TUV is trading at 92 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 7

Type: Short Combination

Calculations:
Total credit = 16
Call breakeven = 96
Put breakeven = 84
Max gain = $1,600
Max loss = unlimited

Intrinsic values at 92:
Call intrinsic = 92 − 80 = 12
Put intrinsic = 100 − 92 = 8

Close-out debit = (12 + 8) × 100 = $2,000
Opening credit = $1,600
Loss = $400

Breakevens:
96 and 84

Profit/Loss on Closing:
–$400

Rationale:
Because the investor sold both options with different strikes, this is a short combination. The maximum gain is the credit received. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value paid and the original credit determines the loss.

Question 8

An investor goes long 1 HJK JAN 40 call @ 3 and long 1 HJK JAN 55 put @ 8.
Just before expiration, HJK is trading at 47 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 8

Type: Long Combination

Calculations:
Total premium = 11
Call breakeven = 51
Put breakeven = 44
Max loss = $1,100
Max gain = unlimited

Intrinsic values at 47:
Call intrinsic = 47 − 40 = 7
Put intrinsic = 55 − 47 = 8

Close-out debit = (7 + 8) × 100 = $1,500
Opening debit = $1,100
Profit = $400

Breakevens:
51 and 44

Profit/Loss on Closing:
+$400

Rationale:
Because the investor purchased both options with different strikes, this is a long combination. The maximum loss is the premiums paid. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value received and the original debit determines the gain.

Question 9

An investor writes 1 MNO APR 200 call @ 12 and writes 1 MNO APR 230 put @ 15.
Just before expiration, MNO is trading at 218 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 9

Type: Short Combination

Calculations:
Total credit = 27
Call breakeven = 227
Put breakeven = 203
Max gain = $2,700
Max loss = unlimited

Intrinsic values at 218:
Call intrinsic = 218 − 200 = 18
Put intrinsic = 230 − 218 = 12

Close-out debit = (18 + 12) × 100 = $3,000
Opening credit = $2,700
Loss = $300

Breakevens:
227 and 203

Profit/Loss on Closing:
–$300

Rationale:
Because the investor sold both options with different strikes, this is a short combination. The maximum gain is the credit received. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value paid and the original credit determines the loss.

Question 10

An investor goes long 1 PQR NOV 95 call @ 8 and long 1 PQR NOV 120 put @ 12.
Just before expiration, PQR is trading at 108 and the investor closes both options at intrinsic value.
What are the maximum gain, maximum loss, breakevens, and the gain or loss on closing?

Answer 10

Type: Long Combination

Calculations:
Total premium = 20
Call breakeven = 115
Put breakeven = 100
Max loss = $2,000
Max gain = unlimited

Intrinsic values at 108:
Call intrinsic = 108 − 95 = 13
Put intrinsic = 120 − 108 = 12

Close-out debit = (13 + 12) × 100 = $2,500
Opening debit = $2,000
Profit = $500

Breakevens:
115 and 100

Profit/Loss on Closing:
+$500

Rationale:
Because the investor purchased both options with different strikes, this is a long combination. The maximum loss is the premiums paid. The breakevens follow the Call UP and Put DOWN rule. At expiration, both options are closed at intrinsic value, and the difference between the intrinsic value received and the original debit determines the gain.