Chapter 11 Trading Strategies Involving Options

1)
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

2)
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

3)
Which of the following creates a bull spread?
A)
Buy a low strike price put and sell a high strike price put
B)
Buy a high strike price put and sell a low strike price put
C)
Buy a high strike price call and sell a low strike price put
D)
Buy a high strike price put and sell a low strike price call

4)
Which of the following creates a bear spread?
A)
Buy a low strike price put and sell a high strike price put
B)
Buy a high strike price put and sell a low strike price put
C)
Buy a high strike price call and sell a low strike price put
D)
Buy a high strike price put and sell a low strike price call
5)
What is the number of different option series used in creating a butterfly
spread?
A)
1
B)
2
C)
3
D)
4

6)
A stock price is currently $23. A reverse (i.e., short) butterfly spread is
created from options with strike prices of $20, $25, and $30. Which of the
following is true?
A)
The gain when the stock price is greater that $30 is less than the gain when
the stock price is less than $20
B)
The gain when the stock price is greater that $30 is greater than the gain when
the stock price is less than $20
C)
The gain when the stock price is greater that $30 is the same as the gain when
the stock price is less than $20
D)
It is incorrect to assume that there is always a gain when the stock price is
greater than $30 or less than $20
7)
Which of the following is correct?
A)
A calendar spread can be created by buying a call and selling a put when the
strike prices are the same and the times to maturity are different
B)
A calendar spread can be created by buying a put and selling a call when the
strike prices are the same and the times to maturity are different
C)
A calendar spread can be created by buying a call and selling a call when the
strike prices are different and the times to maturity are different
D)
A calendar spread can be created by buying a call and selling a call when the
strike prices are the same and the times to maturity are different

8)
What is a description of the trading strategy where an investor sells a 3-month
call option and buys a one-year call option, where both options have a strike
price of $100 and the underlying stock price is $75?
A)
Neutral Calendar Spread
B)
Bullish Calendar Spread
C)
Bearish Calendar Spread
D)
None of the above

9)
Which of the following is correct?
A)
A diagonal spread can be created by buying a call and selling a put when the
strike prices are the same and the times to maturity are different
B)
A diagonal spread can be created by buying a put and selling a call when the
strike prices are the same and the times to maturity are different
C)
A diagonal spread can be created by buying a call and selling a call when the
strike prices are different and the times to maturity are different
D)
A diagonal spread can be created by buying a call and selling a call when the
strike prices are the same and the times to maturity are different

10)
Which of the following is true of a box spread?
A)
It is a package consisting of a bull spread and a bear spread
B)
It involves two call options and two put options
C)
It has a known value at maturity
D)
All of the above

11)
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

12)
How can a strip trading strategy 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
13)
How can a strap trading strategy 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

14)
How can a strangle trading strategy 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

15)
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

16)
Which of the following describes a covered call?
A)
A long call option on a stock plus a long position in the stock
B)
A long call option on a stock plus a short put option on the stock
C)
A short call option on a stock plus a short position in the stock
D)
A short call option on a stock plus a long position in the stock

17)
When the interest rate is 5% per annum with continuous compounding, which of
the following creates a $1000 principal protected note?
A)
A one-year zero-coupon bond plus a one-year call option worth about $59
B)
A one-year zero-coupon bond plus a one-year call option worth about $49
C)
A one-year zero-coupon bond plus a one-year call option worth about $39
D)
A one-year zero-coupon bond plus a one-year call option worth about $29

18)
A trader creates a long 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

19)
A trader creates a long 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 loss (after the cost of the options is taken
into account)?
A)
$100
B)
$200
C)
$300
D)
$400

20)
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