Multiple Choice
1.Which of the following is most equivalent to writing a straddle?
a.buy stock, write two calls
b.buy stock, buy one put
c.short stock, buy one call
d.short stock, buy one put
2.The convergence phenomenon works most to the advantage of the
a.straddle buyer.
b.straddle writer.
c.put writer.
d.call writer.
3.A special feature of long butterfly spreads that attracts some speculators is the fact that they
a.sometimes appear to require no cash outlay.
b.have special margin requirements.
c.do not experience time value decay.
d.require a minimum of commission expense.
4.Which of the following is true regarding combined call writing?
a.The striking price is always above the stock price.
b.The striking price is always at or below the stock price.
c.There is more than one striking price.
d.There is a “synthetic” striking price created.
5.Which of the following is true regarding debit spreads?
a.They are a characteristic of call bull spreads.
b.They are a characteristic of all bull spreads.
c.They result in a cash inflow to your account.
d.They are a characteristic of all butterfly spreads.
6.Which of the following has the potential to lose the most money?
a.a long butterfly spread
b.a short strangle
c.a long strangle
d.a long condor
7.While of the following is a characteristic of a short condor?
a.It has four striking prices.
b.It is constructed with either puts or calls, but not both.
c.It has an unlimited maximum loss.
d.It is the addition of two bull spreads, one with calls and one with puts.
8.Which of the following terms is out of place?
a.time spread
b.calendar spread
c.horizontal spread
d.diagonal spread
9.Which of the following people would benefit most from time value decay?
a.someone with a put bull spread
b.someone with a call bull spread
c.someone with a long straddle
d.someone with a protective put
10.Which of the following is true regarding a hedge wrapper?
a.It often locks in a certain gain while foregoing some potential profits.
b.It reduces downside risk while leaving upside potential unlimited.
c.It involves buying a straddle while you are long the stock.
d.It can involve potentially unlimited losses.
11.Which of the following is most similar to writing a covered call?
a.writing a naked call
b.buying a protective put
c.writing a put and buying the stock
d.writing a put
12.Which of the following is false regarding debit spreads?
a.They are a characteristic of call bull spreads.
b.They are a characteristic of all bull spreads.
c.They result in a cash outlay from your account.
d.One example might be a long butterfly spread.