Which of the following statements best describes the nature of option time value decay?

Which of the following statements best describes the nature of option time value decay?

a. time value decays more rapidly as the stock price approaches being at-the-money
b. time value decays more rapidly as expiration approaches
c. time value decays more rapidly for put option than call options
d. time value decay does not occur for collar option strategies
e. time value decay is detrimental for a trader who is short call options

Answer: B

The purchase of one option and the sale of another is known as

The purchase of one option and the sale of another is known as

a. box
b. bear strategy
c. bull strategy
d. collar
e. spread

Answer: E

Which of the following have similar profit graphs?

Which of the following have similar profit graphs?

a. call bull spread and long box spread
b. put bear spread and short box spread
c. butterfly spread and ratio spread
d. calendar spread and call bear spread
e. none of the above

Answer: E

Early exercise is a disadvantage in which of the following transactions?

Early exercise is a disadvantage in which of the following transactions?

a. short box spread
b. put bear spread
c. long strip (2 puts and 1 call)
d. long strap (2 calls and 1 put)
e. none of the above

Answer: A

Which of the following is the best strategy for an expected fall in the market?

Which of the following is the best strategy for an expected fall in the market?

a. long strip (2 puts and 1 call)
b. put bull spread
c. calendar spread
d. butterfly spread
e. none of the above

Answer: A

Which of the following transactions can have an unlimited loss?

Which of the following transactions can have an unlimited loss?

a. long straddle
b. calendar spread
c. butterfly spread
d. reverse box spread
e. none of the above

Answer: B

Which of the following strategies does not profit in a rising market?

Which of the following strategies does not profit in a rising market?

a. put bull spread
b. long straddle
c. collar
d. call bull spread
e. none of the above

Answer: E

Suppose a put is added to a straddle. This overall transaction is called a strip. Determine the profit at expiration on a strip if the stock price at expiration is $36.

Suppose a put is added to a straddle. This overall transaction is called a strip. Determine the profit at expiration on a strip if the stock price at expiration is $36.

a. -$129
b. $1,416
c. $429
d. $1,384
e. none of the above

Answer: B

Suppose the investor adds a call to the long straddle, a transaction known as a strap. What will this do to the break even stock prices?

Suppose the investor adds a call to the long straddle, a transaction known as a strap. What will this do to the break even stock prices?

a. lower both the upside and downside breakevens
b. raise both the upside and downside breakevens
c. raise the upside and lower the downside breakevens
d. lower the upside and raise the downside breakevens
e. none of the above

Answer: A