Final Exam FIN431

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)?

$100

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?

$300

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)?

$400

American option

- can be exercised at any time up to the expiration date. - "early exercise".

Option vs. futures

-An option gives the holder the right to do something but the holder does not have to exercise the right. In a futurterm-2es contract, the two parties have committed to some action. -It costs a trader nothing (except for the margin) to enter into a futures contract, whereas the purchase of an option requires an up-front payment.

Call option

A contract where the buyer (long) has the right to buy an asset, but not the obligation to buy, while the seller (short, writer) is obligated to sell.

Put option

A contract where the buyer (long) has the right to sell and asset, but not the obligation to sell, while the seller (short, writer) is obligated to buy.

Which of the following describes a protective put?

A long put option on a stock plus a long position in the stock

Stock splits

After an n-for-m stock split, the strike price is reduced to m/n of its previous value, and the number of shares covered by one contract is increased to n/m of its previous value.

Which of the following creates a bear spread?

Buy a high strike price call and sell a low strike price call

Which of the following creates a bull spread?

Buy a low strike price put and sell a high strike price put

How can a straddle be created?

Buy one call and one put with the same strike price and same expiration date

How can a strap trading strategy be created?

Buy two calls and one put with the same strike price and expiration date

European option

Can be exercised only on the expiration date.

The price of a stock is $49. A trader sells 3 put option contracts on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $35. What is the traderâ s net profit or loss?

Loss of $900

Out-of-the-money (OTM)

Negative payoff if the option were exercised immediately.

In-the-money (ITM)

Positive payoff if the option were exercised immediately

An investor has exchange-traded put options to sell 150 shares for $10. There is a 2 for 1 stock split. Which of the following is the position of the investor after the stock split?

Put options to sell 300 shares for $5

Which of the following statements about options is most accurate?

The holder of a put option has the right to sell to the writer of the option.

At-the-money (ATM)

Zero payoff if the option were exercised immediately