Question

1. Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true? (5 points)
   1. It is possible for both options to be in the money.
   2. It is possible for both options to be out of the money.
   3. One of the options must be in the money.
   4. One of the options must be either in the money or at the money.

2. When the stock price increases with all else remaining the same, which of the following is true? (5 points)
   1. Both calls and puts increase in value.
   2. Both calls and puts decrease in value.
   3. Calls increase in value while puts decrease in value.
   4. Puts increase in value while calls decrease in value.
3. Which of the following describes a protective put? (5 points)
   1. A long put option on a stock plus a long position in the stock.
   2. A long put option on a stock plus a short position in the stock.
   3. A short put option on a stock plus a short call option on the stock.
   4. A short put option on a stock plus a long position in the stock.
4. Which of the following describes a covered call? (5 points)
   1. A long call option on a stock plus a long position in the stock.
   2. A long call option on a stock plus a short put option on the stock.
   3. A short call option on a stock plus a short position in the stock.
   4. A short call option on a stock plus a long position in the stock.

Answer 1

Part 1. As there are 2 Options with the same strike price (SP) and stock price can be either higher than SP/ lower than SP/ equal to SP then in that case (Call is in the money/ Put is in the money/ Both options are at the money)

Therefore as above Only one option can be In the Money or At the Money at the same time. Therefore option D is correct.

Part2. When Stock Price increases then Call Option rise in value and Put option drops in Value. Hence Option C is correct.

Part3. Protective Put entails buying stock while hedging the downside risk by buying Put Option. Therfore Option A is the correct answer.

Part 4. Covered Call entails buying Stock and selling Out of the money Calls, thereby to reduce the purchase price and generate extra income while owning stock. Therfore Option D is correct.

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