Reading 72: Risk Management Applications of Option Strat

option, exercise, price, profit

Q11. In October, James Knight owned stock in Valerio, Inc., that was valued at $45 per share. At that time, Knight sold a call option on Valerio with an exercise price of $60 for $1.45. In December, at expiration, the stock is trading at $32. What is Knight’s profit (or loss) from his covered call strategy? Knight:

A) gained $11.55.

B) gained $1.45.

C) lost $11.55.

Q12. George Mote owns stock in IBM currently valued at $112 per share. Mote writes a call option on IBM with an exercise price of $120. The call option is sold for $1.80. At expiration, the price of IBM is $115. What is Mote’s profit (or loss) from his covered call strategy? Mote:

A) gained $4.80.

B) gained $3.00.

C) lost $3.20.

Q13. James Jackson currently owns stock in PNG, Inc., valued at $145 per share. Thinking that PNG is overbought and will decrease in price soon, Jackson writes a call option on PNG with an exercise price of $148 for a premium of $2.40. At expiration of the option, PNG stock is valued at $152 per share. What is the profit or loss from Jackson’s covered call strategy?
Jackson:

A) gained $9.40.

B) gained $5.40.

C) lost $4.60.

Q14. In June, Todd Puckett bought stock in SBC Communications for $30 per share. At that time, Puckett sold an equivalent number of call options on SBC with an exercise price of $35 for $2.75. In September, at expiration, the stock is trading at $26. What is Puckett’s profit per share from his covered call strategy? Puckett:

A) gained $1.25.

B) gained $4.00.

C) lost $1.25.

Q15. Jasper Quartermaine is interested in using the options market to create “insurance” against a severe drop in the value of a stock portfolio that he owns. How could he best accomplish this goal and what is this type of strategy called?'

Type of option Strategy

A) write call options protective put

B) buy put options protective put

C) write call options covered call

Q16. Collete Minogue holds stock in Bracken Entertainment. Although many of her associates still believe that Bracken will be a high-performing stock, Minogue has lost faith and wants to conduct a covered call transaction. Current market conditions are as follows:

Stock price (S) at $33 per share.
Strike price of $39.
Premium of $5.
No transaction costs.

In assessing whether she should conduct the covered call strategy, Minogue sketches out the following graph. Although her sketch is correct, she cannot remember all the labels.

Which of the following statements about the graph and the covered call strategy is least accurate?

A) The distance between points C and D is $5.

B) The call writer will have unlimited upside potential.

C) If Minogue goes ahead with the covered call, she will limit her gain to $11.