Options

Question 1

Long Call

Answer 1

• Speculative Strategy
• Right to Buy
• Bullish

Breakeven= Strike Price + Premium
Max Gain= Unlimited
Max Loss= Premium

Question 2

Short Call

Answer 2

• Speculative Strategy
• AKA Short Naked Call
• Obligation to Sell
• Bearish

Breakeven= Strike Price + Premium
Max Gain= Premium
Max Loss= Unlimited

Question 3

Long Put

Answer 3

• Speculative Strategy
• Right to Sell
• Bearish

Breakeven= Strike - Premium
Max Gain= Breakeven= Strike - Premium
Max Loss= Premium

Question 4

Short Put

Answer 4

• Speculative Strategy
• AKA Short Naked Put
• Obligation to Buy
• Bullish

Breakeven= Strike - Premium
Max Gain= Premium
Max Loss= Breakeven= Strike - Premium

Question 5

Short Stock/Long Call

Answer 5

• Hedging (Protect) Strategy
• Bearish
• Long call stops upside loss on short stock. Protects stock in rising market.

Breakeven= Market + Premium
Max Gain= Market - Premium
Max Loss= Strike - Market + Premium

Question 6

Long Stock/Long Put

Answer 6

• Hedging (Protect) Strategy
• Bullish
• Long put stops downside loss on long stock. Protects stock in falling market.

Breakeven= Market + Premium
Max Gain= Unlimited
Max Loss= Market - Strike + Premium

Question 7

Long Stock/Short Call

Answer 7

• Covered Call
• Income (Cover) Strategy
• Bullish/Neutral
• Write calls against long stock for income. Income strategy in a flat market; Income strategy in a rising market if out the money contracts are sold. Unlimited Upside Risk

Breakeven= Market - Premium
Max Gain= Strike - Market + Premium
Max Loss= Market - Premium
*Occurs if the market price of the stock falls to zero

Question 8

Short Stock/Short Put

Answer 8

• Covered Put
• Income (Cover) Strategy
• Bearish/Neutral
• Write puts against short stock for income; Increasing risk as market falls

Breakeven= Market + Premium
Max Gain= Market - Strike + Premium
Max Loss= Unlimited
*Occurs if the market price of the stock rises

Question 9

Expiration Cycle

Answer 9

Cycle 1: Jan Apr Jul Oct
Cycle 2: Feb May Aug Nov
Cycle 3: Mar Jun Sept Dec

• For each equity security, an option contract can always be issued for the current trading month (“spot”) and for the “next month.” For example, if it is now May 1, contracts can be issued for May (“spot”) and June (“next month”)