Derivatives (Options)

Question 1

True or False: buying a long put involves in paying a premium to receive the right but not obligation to buy an underlying for a specific price at a specific date.

Answer 1

False

A put holder has the right but not obligation to SELL

Question 2

A straddle is a directionally neutral option strategy

Answer 2

True

Question 3

True or false:
The maximum payoff of a long call is equal to the premium received for selling the option

Answer 3

False

The maximum payoff for a long call is unlimited.

Question 4

True or false:
The logical reason for using bull call spreads as opposed to a long call is to reduce the cost and risk with the bullish strategy.

Answer 4

True

Question 5

All strategy that utilises options that expire at different dates is called?

Answer 5

Calendar spread

Question 6

True or False:
Options can be used to increase the risk of a portfolio and aid in speculation

Answer 6

True

Options can act as leverage to a portfolio

Question 7

A perfect hedge on a position of 1 stock of AAPL would involve holding a

1) short call
2) long put

Answer 7

Long put

A short call would offer an imperfect hedge as the maximum payoff if AAPL went down would be equal to the premium received for the option.

Question 8

Options are sold in denominations of how many shares?

Answer 8

100 shares

Question 9

Turning a straddle purchase into a strap would involve what trade?

Answer 9

Purchasing an additional long call option at the same exercise price and expiry date

Question 10

The put-call parity can identify opportunities for arbitrage profits because of?

Answer 10

Market inefficiency