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