Question

1. In May, Mr. Smith buys a July 40 listed call for a $6 premium and sells a July 50 listed call for a $10 premium. Mr. Smith has created:

I. Vertical Spread

II. Horizontal Spread

III. Debit Spread

IV. Credit Spread

2. An investor buys an ABC July 50 call, sells two ABC July 60 calls and buys one ABC 70 call. What is this portfolio called?

a. vertical spread

b. butterfly spread

c. box spread

d. long strangle

e. none of the above

3. A long straddle consists of a:

a. long call and long put

b. short call and short put

c. a short call and long put

d. a short put and long call

e. none of the above

4. On Thursday, February 8, an investor sells five XYZ August 70 calls at 3 and 1/2 each. At the time of the purchase, XYZ is trading at 68 and 1/2 per share. Assume that at the time of expiration XYZ is trading at 69 and 1/2 and the calls are not exercised. What would the investor's profit or loss be?

a. $1,750 loss

b. $250 loss

c. $100 profit

d. $500 profit

e. none of the above

Answer 1

1. Vertical spread is the one where a customer simultaneously buys and sells an option contract covering the same underlying security and same expiration date but with different strike prices.

Horizontal spread is where a customer simultaneously buys and sells an option contract covering the same underlying security and same strike price but with different expiration dates.

Debit spread means that cost of option purchased is higher than the option sold and vice versa for credit spread.

In this question, since the underlying security is same,expiration date is same but strile prices are different, this is a vertical spread . Answer (I)