FINANCIAL MARKETS 2 Options UNIT 2 Options

FINANCIAL MARKETS 2 Options UNIT 2 – Options Strategies Additional practice with related links to solutions at the CBOE Financial Markets 2 Dr. William Sackley 1

(1) An investor who is long the CSCO Mar 25 call at@1. 10 when CSCO 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 Financial Markets 2 Dr. William Sackley 2

(2) If the investor who is long the CSCO Mar 25 call at@1. 10 exercises, then the short position will: A. B. C. D. Have the right to make delivery Have the right to take delivery Be obligated to make delivery Be obligated to take delivery Financial Markets 2 Dr. William Sackley 3

(3) An investor who is long the CSCO Mar 25 call at@1. 10 faces a maximum possible loss of: A. B. C. D. $1. 10 per share $25 per share Unlimited $25 less $1. 10 per share Financial Markets 2 Dr. William Sackley 4

(4) An investor who is short the T Mar 35 put when T 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 Financial Markets 2 Dr. William Sackley 5

(5) The writer of a put contract faces a maximum possible gain of: A. B. C. D. The strike price The price of the underlying at expiration The premium The strike price less the premium Financial Markets 2 Dr. William Sackley 6

(6) If SPY 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 Financial Markets 2 Dr. William Sackley 7

(7) If SPY 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 Financial Markets 2 Dr. William Sackley 8

(8) The short put position is: A. B. C. D. Bullish and hopes the market will decline. Bullish and hopes the market will rise. Bearish and hopes the market will decline. Bearish and hopes the market will rise. Financial Markets 2 Dr. William Sackley 9

(9) If the holder exercises a put, then the writer will have the: A. B. C. D. Right to buy the underlying Right to sell the underlying Obligation to buy the underlying Obligation to sell the underlying Financial Markets 2 Dr. William Sackley 10

(10) The T Mar 35 Call is out of the money when: A. T is trading above $35 per share B. T is trading below $35 per share Financial Markets 2 Dr. William Sackley 11

(11) If in January an investor wants to go long the MRK Jul 50 call trading at $3. 70 when MRK is trading at $47, then in Jan he/she will have to pay: A. B. C. D. $3. 70 per share $47 per share $50 less $3. 70 per share Financial Markets 2 Dr. William Sackley 12

(12) If SPY 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 Financial Markets 2 Dr. William Sackley 13

(13) If SPY 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 Financial Markets 2 Dr. William Sackley 14

(14) The T Mar 35 Put is in the money when: A. T is trading above $35 per share B. T is trading below $35 per share Financial Markets 2 Dr. William Sackley 15

(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 Financial Markets 2 Dr. William Sackley 16

(16) An investor who is long the T Mar 35 put when T 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 Financial Markets 2 Dr. William Sackley 17

(17) An investor that is short the CSCO Mar 25 call at@1. 10 when CSCO 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 Financial Markets 2 Dr. William Sackley 18

(18) An investor who buys an AAPL Feb 130 put at $6. 35 experiences a positive payoff if: A. AAPL trades above $130 per share B. AAPL trades below $130 per share C. AAPL remains at $130 per share Financial Markets 2 Dr. William Sackley 19

Answers Financial Markets 2 Dr. William Sackley 20

(1) An investor who is long the CSCO Mar 25 call at@1. 10 when CSCO 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 Financial Markets 2 Dr. William Sackley 21

(2) If the investor who is long the CSCO Mar 25 call at@1. 10 exercises, then the short position will: A. B. C. D. Have the right to make delivery Have the right to take delivery Be obligated to make delivery Be obligated to take delivery Financial Markets 2 Dr. William Sackley 22

(3) An investor who is long the CSCO Mar 25 call at@1. 10 faces a maximum possible loss of: A. B. C. D. $1. 10 per share $25 per share Unlimited $25 less $1. 10 per share Financial Markets 2 Dr. William Sackley 23

(4) An investor who is short the T Mar 35 put when T 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 Financial Markets 2 Dr. William Sackley 24

(5) The writer of a put contract faces a maximum possible gain of: A. B. C. D. The strike price The price of the underlying at expiration The premium The strike price less the premium Financial Markets 2 Dr. William Sackley 25

(6) If SPY 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 Financial Markets 2 Dr. William Sackley 26

(7) If SPY 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 Financial Markets 2 Dr. William Sackley 27

(8) The short put position is: A. B. C. D. Bullish and hopes the market will decline. Bullish and hopes the market will rise. Bearish and hopes the market will decline. 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. Financial Markets 2 Dr. William Sackley 28

(9) If the holder exercises a put, then the writer will have the: A. B. C. D. Right to buy the underlying Right to sell the underlying Obligation to buy the underlying Obligation to sell the underlying Financial Markets 2 Dr. William Sackley 29

(10) The T Mar 35 Call is out of the money when: A. T is trading above $35 per share B. T is trading below $35 per share Financial Markets 2 Dr. William Sackley 30

(11) If in January an investor wants to go long the MRK Jul 50 call trading at $3. 70 when MRK is trading at $47, then in Jan he/she will have to pay: A. B. C. D. $3. 70 per share $47 per share $50 less $3. 70 per share Financial Markets 2 Dr. William Sackley 31

(12) If SPY 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 Financial Markets 2 Dr. William Sackley 32

(13) If SPY 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 Financial Markets 2 Dr. William Sackley 33

(14) The T Mar 35 Put is in the money when: A. T is trading above $35 per share B. T is trading below $35 per share Financial Markets 2 Dr. William Sackley 34

(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 Financial Markets 2 Dr. William Sackley 35

(16) An investor who is long the T Mar 35 put when T 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 Financial Markets 2 Dr. William Sackley 36

(17) An investor who is short the CSCO Mar 25 call at@1. 10 when CSCO 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 Financial Markets 2 Dr. William Sackley 37

(18) An investor who buys an AAPL Feb 130 put at $6. 35 experiences a positive payoff if: A. AAPL trades above $130 per share B. AAPL trades below $130 per share C. AAPL remains at $130 per share Financial Markets 2 Dr. William Sackley 38

Instructions for the following slides: For the following option strategies, try to: 1) Create a PAYOFF AND PROFIT TABLE using various ending stock prices. 2) Click on the SOLUTION which is available online to compare your answers. 3) TIP: to select various stock prices, you might want to click on the solutions FIRST and use their ending stock prices to simplify matters. Financial Markets 2 Dr. William Sackley 39

Covered Call Writing n Example: XYZ. com is at $40. 50 and has been steady since a tech-related sell-off began a few weeks ago. n Outlook: You are neutral to slightly bullish on XYZ. com for the short term, and believe that, while the technology sell-off appears to be over and XYZ. com shouldn't decline further, it will not recover within the next month. n Possible strategy: Covered Call: Buy 100 shares of XYZ. com at 40. 50. Sell 1 May 45 call at 1. 50 Net cost of 39 ($3, 900. 00) for the position. n Click on this Solution to compare your results Financial Markets 2 Dr. William Sackley 40

Protective Put n Example: XYZ is at $47. You are long 100 shares as of last week and want to be in it for the long run. However, news has just been reported that earnings in the fourth quarter may show a slowdown. n Outlook: Bullish on XYZ but concerned that with this latest report a sell-off of XYZ may be severe. n Possible strategy: Protective Put: Buy 1 XYZ January 45 put at 4. 50. Net debit of 4. 50 or $450. 00. n Click on this Solution to compare your results Financial Markets 2 Dr. William Sackley 41

Long Straddle n Example: In this example, the Dow Jones Industrial Average (DJIA) is at 9, 700. The CBOE's Options on the Dow Index (DJX) is at a level of 97. 00. n Outlook: You are unsure of direction for the market in the short-term, but believe it will be volatile. Want to take a position that may profit if the DJX moves significantly up or down. n Possible Strategy: Long Straddle. Buy 1 DJX January 96. 50 call at 4. Buy 1 DJX January 96. 50 put at 3. 50. n Click on this Solution to compare your results Financial Markets 2 Dr. William Sackley 42

Bull Call Spread n Example: XYZ is at $102. 50. A major Wall Street firm has just upped their rating on XYZ due to strong bullish opinions from their analysts. n Outlook: Bullish on XYZ through mid 2005. n Possible strategy: Bull Call Spread. Buy 1 XYZ June 100 call at 7. Sell 1 XYZ June 110 call at 2. 50. Net debit of 4. 50 or $450. 00. n Click on Solution to compare your results Financial Markets 2 Dr. William Sackley 43

Bear Call Spread n Situation: XYZ is at 30. 50. Recent reports have suggested XYZ is losing money on one of its core businesses. n Outlook: Neutral to Slightly Bearish on XYZ. Believe XYZ stock will suffer in the next three months. n Possible strategy: Bear Call Spread. Sell 1 XYZ August 30 call at 4 Buy 1 XYZ August 35 call at 2 Net credit of 2 or $200. n Click on Solution to compare results Financial Markets 2 Dr. William Sackley 44

Short (Bull) Put Spread n Example: XYZ is at $126, up $0. 75 today. n Outlook: You are moderately bullish on XYZ, and are looking for a trade that will provide a net credit. n Possible strategy: Short Put Spread: Sell 1 XYZ March 125 put at 5. 75. Buy 1 XYZ March 120 put at 4. 25. Net credit of 1. 50 or $150. 00. n Click on Solution to compare results Financial Markets 2 Dr. William Sackley 45

Bear Put Spread n Situation: XYZ is at $37. A political conflict in Europe has arisen in the last several weeks that could potentially affect fourth quarter profits. n Outlook: Bearish on XYZ. You believe that the situation could diminish XYZ profits. Since you're not sure how long it will last, you want to establish a bearish position. n Possible strategy: Bear Spread. Buy 1 XYZ January 40 put at 5. Sell 1 XYZ January 35 put at 2. Net debit of 3. 00 or $300. n Click on Solution to compare results Financial Markets 2 Dr. William Sackley 46