Mid-term test Topic 4

Question 1

33. Which of the following creates a bull spread?
    A. Buy a low strike price call and sell a high strike price call
    B. Buy a high strike price call and sell a low strike price call
    C. Buy a low strike price call and sell a high strike price put
    D. Buy a low strike price put and sell a high strike price call

Answer 1

33. A

Question 2

34. Which of the following creates a bear spread?
    A. Buy a low strike price call and sell a high strike price call
    B. Buy a high strike price call and sell a low strike price call
    C. Buy a low strike price call and sell a high strike price put
    D. Buy a low strike price put and sell a high strike price call

Answer 2

34. B

Question 3

35.	What is the number of different option series used in creating a butterfly spread?
A.	1
B.	2
C.	3
D.	4

Answer 3

35. C

Question 4

36. How can a straddle be created?
    A. Buy one call and one put with the same strike price and same expiration date
    B. Buy one call and one put with different strike prices and same expiration date
    C. Buy one call and two puts with the same strike price and expiration date
    D. Buy two calls and one put with the same strike price and expiration date

Answer 4

36. A

Question 5

37.	A trader creates a long call butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?
A.	$100
B.	$200
C.	$300
D.	$400

Answer 5

37. D

The net premium is = -11 +(14 * 2) - 18 = -1. The maximum gain from a butterfly spread occurs when the spot price is at the mid strike price of 65. Therefore, the long call with a higher strike price is out of the money resulting in a 0 payoff. The payoff of the call with the lower strike price is 65 - 60 = 5 -1 = 4. If a total of 400 options are traded , this provides only 100 bear spread strategies (400/4). Therefore, the total gain is 4 * 100 = 400.

Question 6

38.	Six-month call options with strike prices of $65 and $70 cost $3 and $6, respectively. What is the maximum gain when a bear spread is created by trading a total of 200 options?
A.	$100
B.	$200
C.	$300
D.	$400

Answer 6

38. B

The net premium is = -6 + 3 = -3. The maximum gain from a bear spread is 70 – 65 = 5 – 3 = 2. If a total of 200 options are traded 100 would be bought and 100 would be sold. That provides only 100 bear spread strategies. Therefore, the total gain is 2 * 100 = 200.

Question 7

39.	Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?
A.	$100
B.	$200
C.	$300
D.	$400

Answer 7

39. C

The net premium is = -6 + 4 = -2. The maximum gain from a bull spread is 40 – 35 = 5 – 2 = 3. If a total of 200 options are traded 100 would be bought and 100 would be sold. That provides only 100 bull spread strategies. Therefore, the total gain is 3 * 100 = 300.

Question 8

Which of the following describes a protective put?
A. A long put option on a stock plus a long position in the stock
B. A long put option on a stock plus a short position in the stock
C. A short put option on a stock plus a short call option on the stock
D. A short put option on a stock plus a long position in the stock

Answer 8

40. A