Chapter 11 Trading Strategies Involving Options

15) Which of the following describes a protective put?

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

B) A long put option on a stock plus a short position in the stock

C) A short put option on a stock plus a short call option on the stock

D) A short put option on a stock plus a long position in the stock

16) Which of the following describes a covered call?

A) A long call option on a stock plus a long position in the stock

B) A long call option on a stock plus a short put option on the stock

C) A short call option on a stock plus a short position in the stock

D) A short call option on a stock plus a long position in the stock

17) When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal protected note?

A) A one-year zero-coupon bond plus a one-year call option worth about $59

B) A one-year zero-coupon bond plus a one-year call option worth about $49

C) A one-year zero-coupon bond plus a one-year call option worth about $39

D) A one-year zero-coupon bond plus a one-year call option worth about $29

18) 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)?

A) $100

B) $200

C) $300

D) $400

19) 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)?

A) $100

B) $200

C) $300

D) $400

20) 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?

A) $100

B) $200

C) $300

D) $400