This document contains practice questions and answers about options strategies. It includes 17 multiple choice questions that test understanding of concepts like being long or short different options positions, determining if an option is in, at, or out of the money, and the maximum profit and loss scenarios for options buyers and writers. The document also includes examples of how the payoff and profit is calculated at expiration for long and short positions in stocks, bonds, calls and puts.

1. FIN 433
Speculative Markets
UNIT 2 – Options Strategies
Additional Practice

2. 2
(1) An investor that is long the
ABC Mar 25 call at@1.10
when ABC is trading at $24.20
is said to be long an:
A. In the money call
B. At the money call
C. Out of the money call
© 2016 Dr. N. Richie, UNCW

3. 3
(1) An investor that is long the
ABC Mar 25 call at@1.10
when ABC is trading at $24.20
is said to be long an:
A. In the money call
B. At the money call
C. Out of the money call
© 2016 Dr. N. Richie, UNCW

4. 4
(2) If the investor that is long the
ABC Mar 25 call at@1.10 exercises,
then the short position will:
A. Have the right to make delivery
B. Have the right to take delivery
C. Be obligated to make delivery
D. Be obligated to take delivery
© 2016 Dr. N. Richie, UNCW

5. 5
(2) If the investor that is long the
ABC Mar 25 call at@1.10 exercises,
then the short position will:
A. Have the right to make delivery
B. Have the right to take delivery
C. Be obligated to make delivery
D. Be obligated to take delivery
© 2016 Dr. N. Richie, UNCW

6. 6
(3) An investor that is long the
ABC Mar 25 call at@1.10
faces a maximum possible loss of:
A. $1.10 per share
B. $25 per share
C. Unlimited
D. $25 less $1.10 per share
© 2016 Dr. N. Richie, UNCW

7. 7
(3) An investor that is long the
ABC Mar 25 call at@1.10
faces a maximum possible loss of:
A. $1.10 per share
B. $25 per share
C. Unlimited
D. $25 less $1.10 per share
© 2016 Dr. N. Richie, UNCW

8. 8
(4) An investor who is short the
XYZ Mar 35 put
when XYZ is trading at 37
is said to be short an:
A. In the money put
B. At the money put
C. Out of the money put
© 2016 Dr. N. Richie, UNCW

9. 9
(4) An investor who is short the
XYZ Mar 35 put
when XYZ is trading at 37
is said to be short an:
A. In the money put
B. At the money put
C. Out of the money put
© 2016 Dr. N. Richie, UNCW

10. 10
(5) The writer of a put contract faces a
maximum possible gain of:
A. The strike price
B. The price of the underlying at expiration
C. The premium
D. The strike price less the premium
© 2016 Dr. N. Richie, UNCW

11. 11
(5) The writer of a put contract faces a
maximum possible gain of:
A. The strike price
B. The price of the underlying at expiration
C. The premium
D. The strike price less the premium
© 2016 Dr. N. Richie, UNCW

12. 12
(6) If LMN is trading at $133 per share,
then the Feb 125 Call is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

13. 13
(6) If LMN is trading at $133 per share,
then the Feb 125 Call is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

14. 14
(7) If LMN is trading at $123 per share,
then the Feb 125 Call is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

15. 15
(7) If LMN is trading at $123 per share,
then the Feb 125 Call is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

16. 16
(8) The short put position is:
A. Bullish and hopes the market will decline.
B. Bullish and hopes the market will rise.
C. Bearish and hopes the market will decline.
D. Bearish and hopes the market will rise.
© 2016 Dr. N. Richie, UNCW

17. 17
(8) The short put position is:
A. Bullish and hopes the market will decline.
B. Bullish and hopes the market will rise.
C. Bearish and hopes the market will decline.
D. Bearish and hopes the market will rise.
NOTE: the short put may also have a neutral outlook and
not expect the price of the underlying to move up or down.
© 2016 Dr. N. Richie, UNCW

18. 18
(9) If the holder exercises a put, then
the writer will have the:
A. Right to buy the underlying
B. Right to sell the underlying
C. Obligation to buy the underlying
D. Obligation to sell the underlying
© 2016 Dr. N. Richie, UNCW

19. 19
(9) If the holder exercises a put, then
the writer will have the:
A. Right to buy the underlying
B. Right to sell the underlying
C. Obligation to buy the underlying
D. Obligation to sell the underlying
© 2016 Dr. N. Richie, UNCW

20. 20
(10) The XYZ Mar 35 Call is out of the
money when:
A. XYZ is trading above $35 per share
B. XYZ is trading below $35 per share
© 2016 Dr. N. Richie, UNCW

21. 21
(10) The XYZ Mar 35 Call is out of the
money when:
A. XYZ is trading above $35 per share
B. XYZ is trading below $35 per share
© 2016 Dr. N. Richie, UNCW

22. 22
(11) If in January an investor wants to go
long the DEF Jul 50 call trading at
$3.70 when DEF is trading at $47,
then in Jan he/she will have to pay:
A. $3.70 per share
B. $47 per share
C. $50 per share
D. $50 less $3.70 per share
© 2016 Dr. N. Richie, UNCW

23. 23
(11) If in January an investor wants to go
long the DEF Jul 50 call trading at
$3.70 when DEF is trading at $47,
then in Jan he/she will have to pay:
A. $3.70 per share
B. $47 per share
C. $50 per share
D. $50 less $3.70 per share
© 2016 Dr. N. Richie, UNCW

24. 24
(12) If ABC is trading at $122 per share,
then the Feb 125 Put is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

25. 25
(12) If ABC is trading at $122 per share,
then the Feb 125 Put is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

26. 26
(13) If ABC is trading at $133 per share,
then the Feb 125 Put is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

27. 27
(13) If ABC is trading at $133 per share,
then the Feb 125 Put is
A. In the money
B. At the money
C. Out of the money
© 2016 Dr. N. Richie, UNCW

28. 28
(14) The XYZ Mar 35 Put is in the
money when:
A. XYZ is trading above $35 per share
B. XYZ is trading below $35 per share
© 2016 Dr. N. Richie, UNCW

29. 29
(14) The XYZ Mar 35 Put is in the
money when:
A. XYZ is trading above $35 per share
B. XYZ is trading below $35 per share
© 2016 Dr. N. Richie, UNCW

30. 30
(15) If the holder exercises a put, then
the writer will have to:
A. Make delivery of the underlying
B. Take delivery of the underlying
© 2016 Dr. N. Richie, UNCW

31. 31
(15) If the holder exercises a put, then
the writer will have to:
A. Make delivery of the underlying
B. Take delivery of the underlying
© 2016 Dr. N. Richie, UNCW

32. 32
(16) An investor who is long the
UUU Mar 35 put
when UUU is trading at $33 is
said to be long an:
A. In the money put
B. At the money put
C. Out of the money put
© 2016 Dr. N. Richie, UNCW

33. 33
(16) An investor who is long the
UUU Mar 35 put
when UUU is trading at $33 is
said to be long an:
A. In the money put
B. At the money put
C. Out of the money put
© 2016 Dr. N. Richie, UNCW

34. 34
(17) An investor that is short the
YYY Mar 25 call at@1.10
when YYY is trading at $26.50
is said to be short an:
A. In the money call
B. At the money call
C. Out of the money call
© 2016 Dr. N. Richie, UNCW

35. 35
(17) An investor that is short the
YYY Mar 25 call at@1.10
when YYY is trading at $26.50
is said to be short an:
A. In the money call
B. At the money call
C. Out of the money call
© 2016 Dr. N. Richie, UNCW

36. 36
(18) An investor who buys an
GGG Feb 130 put at $6.35
experiences a positive payoff if:
A. GGG trades above $130 per share
B. GGG trades below $130 per share
C. GGG remains at $130 per share
© 2016 Dr. N. Richie, UNCW

37. 37
(18) An investor who buys an
GGG Feb 130 put at $6.35
experiences a positive payoff if:
A. GGG trades above $130 per share
B. GGG trades below $130 per share
C. GGG remains at $130 per share
© 2016 Dr. N. Richie, UNCW

38. 38
Payoff and Profit of LONG Stock
ABC stock initially purchased for $35
ST Payoff Profit
25.00
30.00
35.00
40.00
© 2016 Dr. N. Richie, UNCW

39. 39
Solution - LONG Stock
ABC stock initially purchased for $35
ST Payoff Profit
25.00 25.00 - 10.00
30.00 30.00 - 5.00
35.00 35.00 0.00
40.00 40.00 + 5.00
© 2016 Dr. N. Richie, UNCW

40. 40
Payoff and Profit of SHORT Stock
ABC stock sold short at $35
ST Payoff Profit
25.00
30.00
35.00
40.00
© 2016 Dr. N. Richie, UNCW

41. 41
Solution - SHORT Stock
ABC stock sold short at $35
ST Payoff Profit
25.00 -25.00 +10.00
30.00 - 30.00 +5.00
35.00 - 35.00 0.00
40.00 - 40.00 - 5.00
© 2016 Dr. N. Richie, UNCW

42. 42
Payoff and Profit of LONG Bond
$100 Face Value initially purchased for $95
ST Payoff Profit
25.00
30.00
35.00
40.00
© 2016 Dr. N. Richie, UNCW

43. 43
Solution - LONG Bond
$100 Face Value initially purchased for $95
ST Payoff Profit
25.00 100.00 +5.00
30.00 100.00 +5.00
35.00 100.00 +5.00
40.00 100.00 +5.00
© 2016 Dr. N. Richie, UNCW

44. 44
Payoff and Profit of SHORT Bond
$100 Face Value initially issued for $95
ST Payoff Profit
25.00
30.00
35.00
40.00
© 2016 Dr. N. Richie, UNCW

45. 45
Solution - SHORT Bond
$100 Face Value initially issued for $95
ST Payoff Profit
25.00 -100.00 -5.00
30.00 -100.00 -5.00
35.00 -100.00 -5.00
40.00 -100.00 -5.00
© 2016 Dr. N. Richie, UNCW

46. 46
Value of LONG Call at Expiration
XYZ Jun 17.50 Call at $2.50
ST In or out? Payoff Profit
12.50
15.00
17.50
20.00
27.50
© 2016 Dr. N. Richie, UNCW

47. 47
Solution - LONG Call at Expiration
ST In or out? Payoff Profit
12.50 Out 0 -2.50
15.00 Out 0 -2.50
17.50 At 0 -2.50
20.00 In 2.50 0
27.50 In 10.00 +7.50
© 2016 Dr. N. Richie, UNCW

48. 48
Value of SHORT Call at Expiration
XYZ Jun 17.50 Call at $2.50
ST In or out? Payoff Profit
12.50
15.00
17.50
20.00
27.50
© 2016 Dr. N. Richie, UNCW

49. 49
Solution - SHORT Call at Expiration
XYZ Jun 17.50 Call at $2.50
ST In or out? Payoff Profit
12.50 Out 0 +2.50
15.00 Out 0 +2.50
17.50 At 0 +2.50
20.00 In -2.50 0
27.50 In -10.00 -7.50
© 2016 Dr. N. Richie, UNCW

50. 50
Value of LONG Put at Expiration
AAA Feb 10 Put at $2.00
ST In or out? Payoff Profit
6.00
8.00
10.00
12.00
14.00
© 2016 Dr. N. Richie, UNCW

51. 51
Solution - LONG Put at Expiration
AAA Feb 10 Put at $2.00
ST In or out? Payoff Profit
6.00 In 4.00 2.00
8.00 In 2.00 0
10.00 At 0 -2.00
12.00 Out 0 -2.00
14.00 Out 0 -2.00
© 2016 Dr. N. Richie, UNCW

52. 52
Value of SHORT Put at Expiration
AAA Feb 10 Put at $2.00
ST In or out? Payoff Profit
6.00
8.00
10.00
12.00
14.00
© 2016 Dr. N. Richie, UNCW

53. 53
Solution - SHORT Put at Expiration
AAA Feb 10 Put at $2.00
ST In or out? Payoff Profit
6.00 In -4.00 -2.00
8.00 In -2.00 0.00
10.00 At 0 +2.00
12.00 Out 0 +2.00
14.00 Out 0 +2.00
© 2016 Dr. N. Richie, UNCW