Investments Chapter 15
At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.
max (0, ST - X)
Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?
short call and long put
A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.
$33; $3.50
A covered call strategy benefits from what environment?
Price stability
Which of the following expressions represents the value of a call option to its holder on the expiration date?
ST - X if ST > X, 0 if ST ≤ X
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a
covered call
If the gross profit is positive and the net profit is negative, you will
exercise the option
What combination of puts and calls can simulate a long stock investment?
long call and short put
You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.
max (-C0, ST - X - C0)
At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.
max (0, X - ST)
You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.
min (P0, ST - X + P0)
You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a
money spread
What strategy could be considered insurance for an investment in a portfolio of stocks?
protective put
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a
protective put
A time spread may be executed by
selling an option with one expiration date and buying a similar option with a different expiration date
Which of the following strategies makes a profit if the stock price stays stable?
short call and short put
You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a
time spread