Question 1

Suppose your portfolio consists of one share of Goldman Sachs (GS)and a European put option on GS with a strike of $105 and a maturity of a year.At maturity,the value of your portfolio must be

Accepted Answer

A)  Equal to or less than $105
B)  Equal to $105
C)  Equal to or greater than $105
D)  None of the above C

Question 2

If you go short a covered call and buy a protective put portfolio on a given stock (with the options having the same strike and maturity),what you have is

Accepted Answer

A)  A long position in a straddle.
B)  Insensitive to the stock price at maturity of the options.
C)  Positive cashflow at inception.
D)  All of the above. A

Question 3

The FTSE index is at 5,100.You are short a straddle on the FTSE 100 struck at 5,100 and long a 5,000/5,200 strangle.If volatility were to increase,

Accepted Answer

A)  The value of your position would increase.
B)  The value of your position would be unaffected.
C)  The value of your position would decrease.
D)  Any of the above is possible. C

Question 4

Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } > K _ { 1 }$ .The current stock price is at $K _ { 1 }$ .The market view for this trade is most likely to be:

Accepted Answer

A)  That the stock is more likely to fall in price than rise in price.
B)  That volatility of the stock is likely to rise.
C)  That the stock is likely to experience high levels of positive skewness in returns.
D)  That the stock will rise but not by an indefinite amount.

Question 5

The 90-,100-,and 110-strike calls are trading at $12,$5,$3,respectively.The stock price is at $100.What is the maximum net payoff on a long butterfly spread using these options?

Accepted Answer

A)    −$5- \$ 5−$5 
B)    $0\$ 0$0 
C)    $5\$ 5$5 
D)    $10\$ 10$10

Question 6

A stock is currently trading at $50.A one-year at-the-money put costs $10.The stock price at the end of one year can be equally likely to be one of the following three values: {20,50,80}.What is the expected one-year return of a protective put portfolio?

Accepted Answer

A)    −16.67%- 16.67 \%−16.67% 
B)    0%0 \%0% 
C)    +16.67%+ 16.67 \%+16.67% 
D)    +50%+ 50 \%+50%

Question 7

The combination of a position in a covered call and a position in a protective put on a stock index (where the options have the same strike and maturity)is similar to:

Accepted Answer

A)  A leveraged long position in the stock.
B)  A leveraged short position in the stock.
C)  A long position in a balanced index fund (i.e. ,long stock and long investment at the risk-free rate) .
D)  A short position in a balanced index fund.(i.e. ,short stock and borrowing at the risk-free rate) .

Question 8

You anticipate a recession with increased stock volatility and greater negative skewness in stock prices.Which of the following option positions would be most consistent with your view?

Accepted Answer

A)  A straddle.
B)  A strip.
C)  A strap.
D)  A vanilla put.

Question 9

If you are interested in creating a retirement portfolio where the downside is protected and you retain at least some upside,the following portfolio will be consistent with your goal:

Accepted Answer

A)  A long stock position plus a long collar position.
B)  A short position in a protective put structure.
C)  A long position in a covered call structure.
D)  A short collar.

Question 10

The FTSE index is at 5,100.You are short a straddle on the FTSE 100.struck at 5,100 and long a 5,000/5,200 strangle.You are also short a 5,000-5,100-5,200 butterfly.Ceteris paribus,an increase in the level of the FTSE

Accepted Answer

A)  Increases the value of your portfolio.
B)  Has no effect on the value of your portfolio.
C)  Decreases the value of your portfolio.
D)  Any of the above is possible.

Question 11

A stock is currently trading at a price of 22.You observe the following prices for European call options on the stock (the strikes are in parentheses): $C ( 20 ) = 3.25$ , $C ( 22 ) = 1.95$ ,and $C ( 24 ) = 0.40$ .You can conclude from this that

Accepted Answer

A)  The 20-strike call is overvalued.
B)  The 24-strike call is undervalued.
C)  The prices of the calls are inconsistent with no-arbitrage.
D)  The stock is mispriced.

Question 12

A stock is currently trading at a price of 22.You observe the following prices for European put options on the stock (the strikes are in parentheses): $C ( 20 ) = 3.35$ and $C ( 22 ) = 1.95$ .Given this information,you can conclude that the minimum price of the 24-strike call consistent with no-arbitrage is

Accepted Answer

A)  0.00.
B)  0.55.
C)  1.40.
D)  2.00.

Question 13

In a covered call strategy:

Accepted Answer

A)  The gross payoff is greater than the net payoff.
B)  The gross payoff is equal to the net payoff.
C)  The gross payoff is smaller than the net payoff.
D)  None of the above is always true.

Question 14

Consider a long position in a 100-strike straddle added to a short position in a 90/110-strike strangle.The underlying is a stock index.This is equivalent to:

Accepted Answer

A)  A stock index contract that pays the absolute return on the index up to  ±10%\pm 10 \%±10% And then pays nothing if the return is outside the range  ±10%\pm 10 \%±10% ) 
B)  A long position in a 90-strike straddle plus a long position in a 110-strike straddle plus a short position in a 100-strike straddle.
C)  A short position in a 90-100-110-strike butterfly call spread plus a zero-coupon bond of face value 10.
D)  A long position in a 90-100-110-strike butterfly call spread plus a long put at 90 and long call at 110.

Question 15

A combination of a long position in a strip and a long position in a strap for the same strike and maturity (and with similar but opposite proportions of calls and puts)is similar to:

Accepted Answer

A)  A strangle position.
B)  A straddle position.
C)  A collar position.
D)  None of the above.

Question 16

A long position in a strangle is:

Accepted Answer

A)  A short squeeze on a straddle.
B)  Worth more than a straddle whose strike lies within that of the strangle.
C)  Worth less than a straddle whose strike lies within that of the strangle.
D)  A choke hold on someone else's throat.

Question 17

What happens to the long position in a 90-100-110-strike call butterfly spread if all the calls are replaced with puts of identical strike and maturity?

Accepted Answer

A)  There is no change in the risks and cash flows of the original position.
B)  The new position is the same as holding a short position in the original call butterfly spread.
C)  The new position is the mirror image of the original one if you consider the x-axis as a mirror.
D)  The gross payoffs remain the same,but the net payoffs are different.

Question 18

The three-month 90-strike call is priced at $5 and the three-month 100-strike call is priced at $3.What is the maximum possible net payoff on a bullish vertical spread using these options?

Accepted Answer

A)  $5
B)  $7
C)  $8
D)  $10

Question 19

The 90-,100-,and 110-strike calls are trading at $12,$5,$3,respectively.The stock price is at $100.What is the maximum net payoff on a short butterfly spread using these options?

Accepted Answer

A)    −$5- \$ 5−$5 
B)    $0\$ 0$0 
C)    $5\$ 5$5 
D)    $10\$ 10$10

Question 20

Consider a position in a long straddle at strike 90 and a short straddle at strike 100,both for the same maturity.which of the following properties is valid for this position?

Accepted Answer

A)  The payoff is increasing in the stock price.
B)  The payoff is always positive.
C)  The payoff is always negative.
D)  The payoff is unbounded.

Exam 8: Options: Payoffs Trading Strategies

Suppose your portfolio consists of one share of Goldman Sachs (GS) and a European put option on GS with a strike of $105 and a maturity of a year.At maturity,the value of your portfolio must be

If you go short a covered call and buy a protective put portfolio on a given stock (with the options having the same strike and maturity) ,what you have is

The FTSE index is at 5,100.You are short a straddle on the FTSE 100 struck at 5,100 and long a 5,000/5,200 strangle.If volatility were to increase,

Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } > K _ { 1 }$ .The current stock price is at $K _ { 1 }$ .The market view for this trade is most likely to be:

The 90-,100-,and 110-strike calls are trading at $12,$5,$3,respectively.The stock price is at $100.What is the maximum net payoff on a long butterfly spread using these options?

A stock is currently trading at $50.A one-year at-the-money put costs $10.The stock price at the end of one year can be equally likely to be one of the following three values: {20,50,80}.What is the expected one-year return of a protective put portfolio?

The combination of a position in a covered call and a position in a protective put on a stock index (where the options have the same strike and maturity) is similar to:

You anticipate a recession with increased stock volatility and greater negative skewness in stock prices.Which of the following option positions would be most consistent with your view?

If you are interested in creating a retirement portfolio where the downside is protected and you retain at least some upside,the following portfolio will be consistent with your goal:

The FTSE index is at 5,100.You are short a straddle on the FTSE 100.struck at 5,100 and long a 5,000/5,200 strangle.You are also short a 5,000-5,100-5,200 butterfly.Ceteris paribus,an increase in the level of the FTSE

A stock is currently trading at a price of 22.You observe the following prices for European call options on the stock (the strikes are in parentheses) : $C ( 20 ) = 3.25$ , $C ( 22 ) = 1.95$ ,and $C ( 24 ) = 0.40$ .You can conclude from this that

In a covered call strategy:

Consider a long position in a 100-strike straddle added to a short position in a 90/110-strike strangle.The underlying is a stock index.This is equivalent to:

A combination of a long position in a strip and a long position in a strap for the same strike and maturity (and with similar but opposite proportions of calls and puts) is similar to:

A long position in a strangle is:

What happens to the long position in a 90-100-110-strike call butterfly spread if all the calls are replaced with puts of identical strike and maturity?

The three-month 90-strike call is priced at $5 and the three-month 100-strike call is priced at $3.What is the maximum possible net payoff on a bullish vertical spread using these options?

The 90-,100-,and 110-strike calls are trading at $12,$5,$3,respectively.The stock price is at $100.What is the maximum net payoff on a short butterfly spread using these options?

Consider a position in a long straddle at strike 90 and a short straddle at strike 100,both for the same maturity.which of the following properties is valid for this position?

Exam 8: Options: Payoffs Trading Strategies

Suppose your portfolio consists of one share of Goldman Sachs (GS) and a European put option on GS with a strike of $105 and a maturity of a year.At maturity,the value of your portfolio must be

If you go short a covered call and buy a protective put portfolio on a given stock (with the options having the same strike and maturity) ,what you have is

The FTSE index is at 5,100.You are short a straddle on the FTSE 100 struck at 5,100 and long a 5,000/5,200 strangle.If volatility were to increase,

Consider a ratio spread comprising a call at strike K1K _ { 1 }K1​ and short two calls at strike K2>K1K _ { 2 } > K _ { 1 }K2​>K1​ .The current stock price is at K1K _ { 1 }K1​ .The market view for this trade is most likely to be:

The 90-,100-,and 110-strike calls are trading at $12,$5,$3,respectively.The stock price is at $100.What is the maximum net payoff on a long butterfly spread using these options?

A stock is currently trading at $50.A one-year at-the-money put costs $10.The stock price at the end of one year can be equally likely to be one of the following three values: {20,50,80}.What is the expected one-year return of a protective put portfolio?

The combination of a position in a covered call and a position in a protective put on a stock index (where the options have the same strike and maturity) is similar to:

You anticipate a recession with increased stock volatility and greater negative skewness in stock prices.Which of the following option positions would be most consistent with your view?

If you are interested in creating a retirement portfolio where the downside is protected and you retain at least some upside,the following portfolio will be consistent with your goal:

The FTSE index is at 5,100.You are short a straddle on the FTSE 100.struck at 5,100 and long a 5,000/5,200 strangle.You are also short a 5,000-5,100-5,200 butterfly.Ceteris paribus,an increase in the level of the FTSE

In a covered call strategy:

Consider a long position in a 100-strike straddle added to a short position in a 90/110-strike strangle.The underlying is a stock index.This is equivalent to:

A combination of a long position in a strip and a long position in a strap for the same strike and maturity (and with similar but opposite proportions of calls and puts) is similar to:

A long position in a strangle is:

What happens to the long position in a 90-100-110-strike call butterfly spread if all the calls are replaced with puts of identical strike and maturity?

The three-month 90-strike call is priced at $5 and the three-month 100-strike call is priced at $3.What is the maximum possible net payoff on a bullish vertical spread using these options?

The 90-,100-,and 110-strike calls are trading at $12,$5,$3,respectively.The stock price is at $100.What is the maximum net payoff on a short butterfly spread using these options?

Consider a position in a long straddle at strike 90 and a short straddle at strike 100,both for the same maturity.which of the following properties is valid for this position?

Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } > K _ { 1 }$ .The current stock price is at $K _ { 1 }$ .The market view for this trade is most likely to be: