Trading Strategies Involving Options

1. A butterfly spread is appropriate when:

• • The investor wants to limit their risk while still having the potential to profit.

• • The investor wants to limit their risk while still having the potential to profit.

• • The investor wants to limit their risk while still having the potential to profit.

• • The investor expects the underlying asset to remain within a specific price range.

• • All of the above.

Which of the following is a key difference between a straddle and a strangle?

• • The strike price of the options is the same in a straddle, but different in a strangle.

• • The straddle is more expensive than the strangle.

• • The strangle has less profit potential than the straddle.

• • The straddle has a higher risk than the strangle.

An investor believes that the price of a stock is going to move significantly, but they are not sure in which direction. Which options strategy would be the best choice for this investor?

• • A straddle

• • A strangle

• • A call option

• • A put option

Which of the following is a true statement about straddles and strangles?

• • Straddles are more expensive than strangles, but have more profit potential.

• • Strangles are less expensive than straddles, but have less profit potential.

• • Straddles and strangles have the same profit potential, but strangles are more expensive.

• • Straddles and strangles have the same cost, but strangles have less risk.

A bull spread using call options is a strategy that:

• • Profits if the underlying asset price rises above the strike price of the short call option.

• • Profits if the underlying asset price falls below the strike price of the long call option.

• • Limits the investor's losses if the underlying asset price falls.

• • Limits the investor's losses if the underlying asset price rises.

An investor believes that the price of a stock is going to rise in the next few months. Which options strategy would be the best choice for this investor?

• • A bull spread using call options

• • A bear spread using call options

• • A bull spread using put options

• • A bear spread using put options

Which of the following is a true statement about a bull spread using call options?

• • The maximum profit is limited to the difference between the strike prices of the two call options.

• • The maximum loss is limited to the premium paid for the long call option.

• • The profit potential is limited if the underlying asset price rises significantly.

• • The risk is limited if the underlying asset price falls significantly.