Question

Question 20

Which of the following strategies poses the greatest risk to an investor

• a long stock position
• a covered call position
• a short straddle
• a long straddle
• none of the above

Question 21

Which of the following have similar profit diagrams?

• $1,750 loss
• $1,250 loss
• $100 profit
• $500 profit
• none of the above

Question 45

The sale of a put option would be considered to be fully covered when:

• The account is long 100 shares of the underlying stock
• Cash equal to the exercise price is deposited in the account
• A put with a higher exercise price is long in the account
• The account is also short 100 shares of the underlying stock
• more than one of the above is correct

Answer 1

20) The correct option is "Short Straddle"

In short straddle you expect that the stock price will remain stationary. So you sell "Call option" and "Put Option" at the same strike price. If the stock price either moves extreme up or extreme down, then you are going to make tremendous losses.

21) The question is incomplete. Not enough data. Similar profit diagram compared to what?

45) The answer is the last option.

Selling put will be loss when the stock price goes down. so if you are short the stock, then as the stock price goes down, you earn from the short of stock and that profit is nullified from the loss of short of put option.

If you are long a put at higher exercise, then the profit from long put will nullify the loss from short put.

Cash deposited at the exercise amount will also cover as the maximum loss in short put can be the exercise price of option.