OPTIONS: INCOME STRATEGIES

To generate additional income in a stable market, a customer who is long stock could: A. buy a call B. sell a call C. buy a put D. buy a straddle

B. Sell a call

Long Stock / Short Call

-generate extra income the market will remain FLAT -market remains FLAT = call expires "at the money" and the customer's cost of the stock is reduced by the collected premium -market RISES = call goes "in the money" and is exercised, obligating the customer to deliver the stock at the strike price; the customer does not enjoy any further gains on the stock. -maximum gain = collected premium, net of any difference between the cost of the stock and the strike price. - market FALLS = call expires "out the money" and the customer loses on the stock position -maximum loss = cost of the stock - collected premium.

Short Stock / Short Put

-generate extra income the market will remain FLAT -market remains FLAT = put expires "at the money" and the customer's short sale proceeds are increased by the collected premium -market FALLS = put goes "in the money" and is exercised, obligating the customer to buy the stock at the strike price, closing out the short stock position; the customer does not enjoy any further gains on the stock. -maximum gain = collected premium, net of any difference between the short sale price and the strike price. -market RISES = put expires "out the money" and the customer loses on the short stock position. -Maximum potential loss is unlimited.

A customer buys 100 shares of ABC stock at $40 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The breakeven point is: A. $38 B. $40 C. $42 D. $47

40-2=38 STOCK COST - PREMIUM = LONG STOCK/SHORT CALL BREAKEVEN

A customer sells short 100 shares of DEF stock at $63 and sells 1 DEF Oct 60 Put @ $6. The market rises to $68 and the put expires. The customer buys the stock in the market covering her short stock position. The gain or loss is: A. $100 gain B. $100 loss C. $300 gain D. $300 loss

A. $100 gain If the market rises, the short put expires. Here, the customer buys the stock at $68 to cover her short stock position that was originally sold at $63. There is a 5 point or $500 loss, that is offset by the $600 in premiums received. Thus, there is a net gain of $100.

A customer sells short 100 ABC @ $37 and sells 1 ABC Jan 35 Put @ $4. The customer would NOT make money if the market price for ABC was at: A. $42 B. $40 C. $37 D. $35

A. $42 SHORT SALE PRICE + PREMIUM = SHORT STOCK/SHORT PUT BREAKEVEN 37 + 4 = 41 LOSE WHEN OVER $41

A customer sells short 100 shares of PDQ at $47 and sells 1 PDQ Sep 50 Put @ $6. The customer will have a loss at which of the following market prices for PDQ? A. $55 B. $53 C. $47 D. $41

A. $55 47+6=55 SHORT SALE PRICE + PREMIUM = SHORT STOCK/SHORT PUT BREAKEVEN

A customer buys 100 shares of ABC stock which is now trading at $63. A month later the market goes to $65. The customer thinks the market will remain near $65 in the following months, so he decides to sell 1 ABC Sept 65 Call @ $3. ABC then goes to $60 and the customer's call contract expires and the customer decides to liquidate his stock position at the current market price. The customer has: A. no gain or loss B. a $300 gain C. a $300 loss D. a $500 loss

A. no gain or loss

A customer sells short 100 shares of PDQ at $47 and sells 1 PDQ Sep 50 Put @ $6. The maximum potential gain while both positions are in place is: A. 0 B. $300 C. $600 D. unlimited

B. $300 If the market falls, the short put is exercised and the stock must be bought at $50. Since it was already "sold" at $47, there is a loss of $3 per share ($300 total). But the customer collected $600 in premiums; so the end result is a net gain or $300. This is the maximum potential gain. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss.

A customer sells short 100 shares of PDQ stock at $59 and sells 1 PDQ Oct 60 Put @ $6. The market rises to $68 and the put expires. The customer buys the stock in the market covering her short stock position. The gain or loss is: A. $100 gain B. $300 loss C. $600 gain D. $900 loss

B. $300 loss If the market rises, the short put expires. Here, the customer buys the stock at $68 to cover her short stock position that was originally sold at $59. There is a 9 point or $900 loss, that is partially offset by the $600 in premiums received. Thus, there is a net loss of $300.

A customer sells short 100 shares of PDQ at $47 and sells 1 PDQ Sep 50 Put @ $6. The breakeven point is: A. $55 B. $53 C. $47 D. $41

B. $53 47+6 = 53 SHORT SALE PRICE + PREMIUM = SHORT STOCK/SHORT PUT BREAKEVEN

A customer sells short 100 shares of ABC stock at $63 per share. The stock falls to $47, at which point the customer writes 1 ABC Sept 45 Put at $2. The stock falls to $36 and the put is exercised. The customer has a gain per share of: A. 18 points B. 20 points C. 27 points D. 29 points

B. 20 points sold the stock short at $63 per share (sale proceeds). Later, the customer sold a Sept 45 Put @ $2 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $45 per share. Since the customer received $2 in premiums when the put was sold, the net cost to the customer is $43 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is $63 sale proceeds - $43 cost basis = 20 points.

Which of the following option positions is used to generate additional income against a long stock position? A. long call B. short call C. long put D. short put

B. short call

A customer buys 200 shares of ABC at $68 and sells 2 ABC 70 Calls @ $3. The market rises to $80 and the calls are exercised. The customer has a: A. $300 gain B. $600 gain C. $1,000 gain D. $2,000 gain

C. $1,000 gain stock = $68 per share sold = $70 strike price $2 gain x 200 shares = $400 $300 per contract for selling the calls, for a total of $600 in premiums received. Therefore, the total gain is $400 + $600 = $1,000.

What is the maximum potential loss for a customer who is long 100 ABC at $39 and short 1 ABC Jan 40 Call at $5? A. $500 B. $600 C. $3,400 D. $3,900

C. $3,400 39-5 = 34

A customer buys 100 shares of ABC stock at $40 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is: A. $200 B. $500 C. $700 D. unlimited

C. $700 market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $40 for the $45 strike price, resulting in a $500 gain. Since $200 was collected in premiums, the total gain is $700. This is the maximum potential gain while both positions are in place.

An investor sells short 100 shares of ABC stock at $69 and sells 1 ABC Jan 70 Put @ $5 on the same day in a margin account. The breakeven point is: A. $64 B. $65 C. $74 D. $75

C. $74 69 + 5 = 74 SHORT SALE PRICE + PREMIUM = SHORT STOCK/SHORT PUT BREAKEVEN

A customer sells short 100 shares of ABC stock at $96 per share. The stock falls to $83, at which point the customer writes 1 ABC Sept 80 Put at $1. The stock falls to $74 and the put is exercised. The customer has a gain per share of: A. 14 points B. 16 points C. 17 points D. 23 points

C. 17 points sold the stock short at $96 per share (sale proceeds). Later, the customer sold a Sept 80 Put @ $1 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $80 per share. Since the customer received $1 in premiums when the put was sold, the net cost to the customer is $79 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is: $96 sale proceeds - $79 cost basis = 17 points.

A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The customer will have a loss at which of the following market prices for PDQ? A. $42 B. $43 C. $55 D. $56

D. $56 49+6=56 SHORT SALE PRICE + PREMIUM = SHORT STOCK/SHORT PUT BREAKEVEN

A customer buys 100 shares of ABC stock which is trading at $55. Subsequently, the market moves to $60. The customer thinks the market will remain at $60 in the following months, so he sells 1 ABC Sept 60 Call @ $3. ABC then goes to $58 and the customer's call contract expires and the customer decides to liquidate his stock position at the current market price. The customer has a: A. $300 loss B. $300 gain C. $600 loss D. $600 gain

D. $600 gain bought the stock at $55 and sells it at $58 for a $3 gain. However, he also sold the call at $3. The aggregate gain on both transactions is +$3 + $3 = $600 gain.

A customer sells short 500 shares of XYZ stock at $69 and sells 5 XYZ Jan70 Puts @ $3. The maximum loss potential is: A. $500 B. $6,600 C. $6,700 D. Unlimited

D. Unlimited

An options strategy where the maximum potential loss is equal to the difference between the increase in value of the underlying short securities position and the premiums received is a: A. naked call writer B. covered call writer C. naked put writer D. covered put writer

D. covered put writer

Which of the following option positions is used to generate additional income against a short stock position? A. long call B. short call C. long put D. short put

D. short put

Short Stock / Short Put Breakeven

SHORT SALE PRICE + PREMIUM = SHORT STOCK/SHORT PUT BREAKEVEN

Long Stock / Short Call Breakeven

STOCK COST - PREMIUM = LONG STOCK/SHORT CALL BREAKEVEN