Futures and Hedging Worksheet (Pages 2–6)

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a

bullish money spread to help limit the cost of your option position. You find the following option quotes:

• sell the 55 put and buy the 45 put

• buy the 45 put and buy the 55 put

• buy the 55 put and sell the 45 put

• sell the 45 put and sell the 55 put

23) You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:

Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is ________.

• $500

• $700

• $200

• $250

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months.

The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

Suppose you write a strap and the stock price winds up to be $42 at contract expiration.

What was your net profit on the strap?

• $200

• $300

• $700

• $400

A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months.

You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%.

At- the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

• $300

• $200

• $475

• $0

A covered call strategy benefits from what environment?

• Falling interest rates

• Price stability

• Price volatility

• Unexpected events

Which of the following strategies makes a profit if the stock price stays stable?

• long call and short put

• long call and long put

• short call and short put

• short call and long put

If you combine a long stock position with selling an at‑the‑money call option, the resulting net payoff profile will resemble the payoff profile of a _____.

• long call

• short call

• short put

• long put

What strategy could be considered insurance for an investment in a portfolio of stocks?

• covered call

• protective put

• short put

• straddle

You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

• buy a strip

• buy a strap

• buy a straddle

• write a straddle

Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end.

Bill wants to use a collar to ensure that he minimizes his risk and

doesn't incur too much cost in deferring the gain.

January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is ________.

• $195,000

• $220,000

• $175,000

• $215,000