Options Strategies

Correct Answer: The investor is implementing a bull call spread strategy. The maximum profit potential is $400, calculated as (($45 - $40) - ($3 - $1)) × 100 shares per contract.

The investor is implementing a bull call spread strategy. In this strategy, the investor buys a call option with a lower strike price and simultaneously sells a call option with a higher strike price, both having the same expiration date. This strategy is used when the investor has a moderately bullish outlook on the stock. To calculate the maximum profit potential, we need to find the difference between the strike prices of the two options and subtract the net premium paid. The investor bought the $40 call for $3 and sold the $45 call for $1, resulting in a net premium of $2 per share. Maximum profit = (Higher strike price - Lower strike price) - Net premium paid Maximum profit = ($45 - $40) - ($3 - $1) Maximum profit = $5 - $2 = $3 per share Since each option contract represents 100 shares, the maximum profit potential is $3 × 100 = $300. The other answers are incorrect because they either misidentify the strategy or miscalculate the maximum profit potential.

Correct Answer: The investor is implementing a short strangle strategy. If the stock price rises to $70 at expiration, the 55 put will expire worthless, and the 65 call will be exercised, resulting in a loss of $3.50 per share (($65 - $70) + $1.50 premium received) or $350 per contract.

The investor is implementing a short strangle strategy. A short strangle involves selling an out-of-the-money call option and an out-of-the-money put option simultaneously, with the same expiration date but different strike prices. In this case, the investor sells a 55 put (below the current stock price of $60) and a 65 call (above the current stock price). The investor receives premiums of $2 per share for the put and $1.50 per share for the call. If the stock price rises to $70 at expiration, the 55 put will expire worthless, and the investor keeps the $2 premium. However, the 65 call will be exercised, and the investor will have to sell shares at $65 while the market price is $70. This results in a loss of $5 per share on the call, offset by the $1.50 premium received, for a net loss of $3.50 per share. With 100 shares per contract, the total loss on the call is $350 per contract. The investor keeps the $200 premium from the put, resulting in an overall loss of $150 per contract. The other strategies mentioned are incorrect because: - A short straddle involves selling both a call and a put with the same strike price, which is not the case here. - A long strangle involves buying an out-of-the-money call and put, whereas the investor is selling these options.

Correct Answer: The investor is implementing a short strangle strategy. The maximum profit potential is $300, which is the total premium received from selling the put and call options ($200 + $100 = $300), assuming the stock price remains between the strike prices of $45 and $55 at expiration.

The investor is implementing a short strangle strategy. A short strangle involves selling an out-of-the-money call option and an out-of-the-money put option with different strike prices but the same expiration date. The investor sells a put option with a strike price of $45 and a call option with a strike price of $55, both expiring on the same date. This strategy is suitable for a neutral to slightly bearish outlook, as the investor expects the stock price to remain stable or decrease slightly. The maximum profit potential is the total premium received from selling the put and call options. In this case, the investor receives $200 from selling the put option (1 contract × 100 shares per contract × $2 premium per share) and $100 from selling the call option (1 contract × 100 shares per contract × $1 premium per share). The total premium received is $300, which is the maximum profit potential if the stock price remains between the strike prices of $45 and $55 at expiration. The other strategies mentioned are incorrect because: - A short straddle involves selling a call and a put option with the same strike price and expiration date, which is not the case here. - A short butterfly spread involves selling one call and one put at a middle strike price, and buying one call and one put at an upper and lower strike price, respectively. This strategy is not applicable to the given scenario.