P1.T3.211. Option trading strategies (I. Spreads)

Discussion in 'Today's Daily Questions' started by Suzanne Evans, Aug 14, 2012.

  1. Suzanne Evans

    Suzanne Evans Administrator


    211.1. Among the following four strategies, which trading strategy both (i) involves an initial cash inflow to the investor and (ii) a positive future payoff in the event of a sufficiently low future stock price (option profit = future payoff - initial cost, without regard to time value of money)?

    a. Bull spread with calls
    b. Bull spread with puts
    c. Bear spread with calls
    d. Bear spread with puts

    211.2. Today (T0), the current price of a stock is $20.00. Also today, the price of a six-month at-the-money (ATM) call option and an one-year ATM call option on the same stock is, respectively, $1.88 and $2.75. The strike price of both calls is $20.00 (i.e., ATM). Over the subsequent six months, it happens that the stock price, the stock's volatility and the risk-free rate are all unchanged: in six months, the stock price remains $20.00, the stock's volatility remains at 30.0%, and the riskfree rate remains at 4.0%. In six months (T+ 0.5 years), at expiration of the shorter maturity option, what is the profit of a neutral calendar spread ("neutral" refers to the use of ATM call options to employ the calendar spread)?

    a. -$0.87
    b. Zero
    c. +$1.01
    d. +$2.75

    211.3. Hull's spread strategies include the following: bull spread, bear spread, box spread, calendar spread, and butterfly spread. In regard to these spread strategies, each of the following is true EXCEPT which statement is false?

    a. A spread trade involves taking a position in two or more options of the same type; i.e., two or more calls or two or more puts
    b. All of the long spread trades listed above generate a profit, with regard to time value of money, if the underlying stock price is unchanged (constant) over the option lives
    c. All of the long spread trades listed above have a limited (capped) downside
    d. All of the long spread trades listed above have a limited (capped) upside

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