LOS b: Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of a covered call strategy and a protective put strategy, and explain the risk management application of each strategy.

Q1. Given the payoff diagram shown below of an option combined with a long position in a stock, which of the following statements most accurately describes the profit or loss potential to the holder of the combined position?

A)   The maximum loss on the long put is its cost.

B)   The maximum profit on the long call is unlimited.

C)   The maximum profit on the short put is $2.

Q2. An investor buys a 30 put on a share of stock for a premium of $7 and simultaneously buys a share of stock for $26. The breakeven price on the position and the maximum gain on the position are:

          Breakeven price                      Maximum gain

A)      $33                                        unlimited

B)      $21                                          $11

C)      $37                                          $11

Q3. An investor buys a share of stock at $33 and simultaneously writes a 35 call for a premium of $3. What is the maximum gain and loss?

         Maximum Gain    Maximum Loss

A)     unlimited                   -$33

B)        $2                         -$35

C)        $5                         $30

Q4. The shape of a protective put payoff diagram is most similar to a:

A)   short call.

B)   covered call.

C)   long call.

Q5. A covered call position is:

A)   the simultaneous purchase of the call and the underlying asset.

B)   the purchase of a share of stock with a simultaneous sale of a put on that stock.

C)   the purchase of a share of stock with a simultaneous sale of a call on that stock.

LOS b: Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of a covered call strategy and a protective put strategy, and explain the risk management application of each strategy. fficeffice" />

Q1. Given the payoff diagram shown below of an option combined with a long position in a stock, which of the following statements most accurately describes the profit or loss potential to the holder of the combined position?

A)   The maximum loss on the long put is its cost.

B)   The maximum profit on the long call is unlimited.

C)   The maximum profit on the short put is $2.

Correct answer is A)        

This is a graph of a protective put, which is a combination of owning the stock and purchasing a put on the same stock. The maximum loss on the put is its $2 cost. The statements regarding the maximum profit on a long call or a short put are true, but neither of these positions are held by the owner of the protective put.

Q2. An investor buys a 30 put on a share of stock for a premium of $7 and simultaneously buys a share of stock for $26. The breakeven price on the position and the maximum gain on the position are:

          Breakeven price                      Maximum gain

A)      $33                                        unlimited

B)      $21                                          $11

C)      $37                                          $11

Correct answer is A)

To break even, the stock price should rise as high as the amount invested, $33 ($26 + $7). The maximum gain is unlimited, as the gain will be as high as the increase in the stock price.

Q3. An investor buys a share of stock at $33 and simultaneously writes a 35 call for a premium of $3. What is the maximum gain and loss?

         Maximum Gain    Maximum Loss

A)     unlimited                   -$33

B)        $2                         -$35

C)        $5                         $30

Correct answer is C)

The maximum gain on the stock itself is $2 ($35 ? $33). At stock prices above the exercise price, the stock will be called away from the investor. The gain from writing the call is $3 so the total maximum gain is $5. If the stock ends up worthless, the call writer still has the call premium of $3 to offset the $33 loss on the stock so the total maximum loss is $30.

Q4. The shape of a protective put payoff diagram is most similar to a:

A)   short call.

B)   covered call.

C)   long call.

Correct answer is A)

The payoff diagram for a protective put is like that of a call option but shifted upward by the exercise price of the put.

Q5. A covered call position is:

A)   the simultaneous purchase of the call and the underlying asset.

B)   the purchase of a share of stock with a simultaneous sale of a put on that stock.

C)   the purchase of a share of stock with a simultaneous sale of a call on that stock.

Correct answer is A)

The covered call: stock plus a short call. The term covered means that the stock covers the inherent obligation assumed in writing the call. Why would you write a covered call? You feel the stock’s price will not go up any time soon, and you want to increase your income by collecting some call option premiums. To add some insurance that the stock won’t get called away, the call writer can write out-of-the money calls. You should know that this strategy for enhancing one’s income is not without risk. The call writer is trading the stock’s upside potential for the call premium. The desirability of writing a covered call to enhance income depends upon the chance that the stock price will exceed the exercise price at which the trader writes the call.

[此贴子已经被作者于2009-3-2 12:34:31编辑过]

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