Question

mich of the following strategy can make profit from underlying price drop? A. Buying a put B. Selling a put C. Protective put D. Bullish spread E. None above 7. Which of the following is the riskiest single-option transaction? A. Writing a call B. Buying a put C. Writing a put D. Buying a call E. Riskiness of the all the strategies above is the same 8. Which of the following combinations have similarly shaped profit/loss diagrams? A. Covered Call vs. a short stock combined with a long call B. long put option combined with a long call option vs. protective put C. long call option combined with a short put option vs. short a stock D. short call option vs. protective put E. None above 9. Suppose a put option has X=35 and Premium=10. For a strategy that sell this put, what is the minimum payoff and minimum profit? A. Minimum payoff=0, minimum profit=0 B. Minimum payoff=35, minimum profit=45 C. Minimum payoff=-35, minimum profit=-25 D. Minimum payoff--35, minimum profit=-45 E. None above of $75 will expire in 73 days. No cash payments will

Answer 1

Q6)

• Buying a put is the option that can lead to a profit in case of a price drop below the strike price when the price falls enough to exceed the amount of premium paid.
• Writing a call would not lead to a profit in fact it will lead to a loss if the price fall enough.
• Protective put is when the underlying is owned and in that case, the price drop will lead to a loss on the underlying and a profit on the put option so it can be possible that both cancel each other out.
• Bull spread leads to a profit in a price rise situation
• So option A is correct.

Q7)

• Writing a call is the riskiest single option strategy because the price of the underlying can increase indefinitely leading to an infinite loss.
• Buying a call or a put limits the loss as the strike price is predetermined and if the option is out of the money, only the amount of premium is the loss.
• Writing a put has limited loss because the price of the underlying can fall at max to 0 cant go beyond that.
• So option A is correct.

Q8)

• Protective put = long stock + long put
• Covered call = long stock + short call, so option A is incorrect
• Long put + long call = straddle not the protective put, so option B is incorrect
• Long call + short put = long stock not short stock, so option C is incorrect
• Long call is equivalent to protective put, so option D is correct

Q9) When writing the put, we say that when the price is below 35, we will buy the stock at 35 and when it is above 35, the long party will not exercise the option. Therefore, maximum payoff could be when the price goes down to 0 and then the payoff will be 0-35 = -35 and as we have received the premium of 10, the profit = -35+10 = -25, so the correct option is C