Exam 18: Option Valuation and Strategies

An investor cannot buy and sell two different call options with the same expiration dates.

If the investor buys a bear spread, the individual anticipates

The hedge ratio indicates the number of call options that is necessary to offset price movements in the underlying stock.

An increase in the VIX is associated with

Buying a call and a treasury bill produces similar results as buying a stock and a put.

If a stock is selling for $33 and the price is not expected to fluctuate, what are the potential profits and losses from writing a straddle if a call option at $35 sells for $3 and the put option at $35 sells for $4?

If the investor anticipates that the price of a stock will fluctuate, this individual may

Put-call parity suggests that the sum of the prices of a stock, a call and a put on that stock, and a debt instrument maturing at the expiration of the options must equal zero.

According to the Black/Scholes option valuation model, the value of a call option rises as it approaches expiration.

The protective call strategy is an illustration of a short position.

Put-call parity asserts that a combination of a long position in the stock and the put produces the same return as a comparable position in a call and a risk-free bond. If not, at least one market is in disequilibrium. The resulting arbitrage alters the securities' prices until the value of the stock plus the put equals the prices of the call and the bond. The successful use of arbitrage assumes the investor of a profit no matter what happens to the price of the stock. Put-call parity also asserts that if an arbitrage opportunity does not exist, then a combination of the stock and the put produces the same return as the comparable position in the call and the risk-free bond. Currently, the price of a stock is $70 while the price of a call option at $70 is $6; the price of the put option at $70 is $2, and the price of a discounted bond is $66. Verify that a long position in the stock and the put produces the same performance as a long position in the call and the bond for the following prices of the stock: $60, 65, 70, 75, and 80.

Bull and Bear spreads require taking a long position in one option and a short position in another option with a different strike price.

If investors believe that a stock's price will fluctuate but they are not certain as to the direction, these investors may buy a straddle.

Put-call parity suggests that

If the investor buys a bull spread, the individual anticipates

The hedge ratio is one piece of information given by the Black/Scholes option valuation model.

According to the Black/Scholes option valuation model, a call option's value increases if

Writing both a put and a call at the same strike price and expiration date is an illustration of a straddle.

To acquire a straddle, the investor

An investor buys a straddle in anticipation of stable stock prices.