Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 12: Trading Strategies Involving Options
Multiple Choice Test Bank: Questions with Answers
1. Which of the following creates a bull spread?
A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
Answer: A
A bull spread is created by buying a low strike call and selling a high strike call.
Alternatively, it can be created by buying a low strike put and selling a high strike put.
2. Which of the following creates a bear spread?
A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
Answer: B
A bear spread is created by buying a high strike call and selling a low strike call.
Alternatively, it can be created by buying a high strike put and selling a low strike put.
3. Which of the following creates a bull spread?
A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
Answer: A
A bull spread is created by buying a low strike call and selling a high strike call.
Alternatively, it can be created by buying a low strike put and selling a high strike put.
4. Which of the following creates a bear spread?
A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
Answer: B
A bear spread is created by buying a high strike call and selling a low strike call.
/
, Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 12: Trading Strategies Involving Options
Multiple Choice Test Bank: Questions with Answers
Alternatively, it can be created by buying a high strike put and selling a low strike put.
5. What is the number of different option series used in creating a butterfly spread?
A. 1
B. 2
C. 3
D. 4
Answer: C
Three different options all with the same maturity are involved in creating a butterfly
spread. The strike prices are usually equally spaced. The creator buys the low strike
option, buys the high strike option, and sells two of the intermediate strike option
6. A stock price is currently $23. A reverse (i.e short) butterfly spread is created from
options with strike prices of $20, $25, and $30. Which of the following is true?
A. The gain when the stock price is greater than $30 is less than the gain when the
stock price is less than $20
B. The gain when the stock price is greater than $30 is greater than the gain when
the stock price is less than $20
C. The gain when the stock price is greater than $30 is the same as the gain when
the stock price is less than $20
D. It is incorrect to assume that there is always a gain when the stock price is
greater than $30 or less than $20
Answer: C
The gain from a very high stock price or a very low stock price is the same. Suppose
calls are used. In the case of a very low stock price none are exercised and the gain
is c1+c3−2c2 from the option premium. In the case of a very high stock price all
options are exercised. The net payoff is zero and the gain is the same.
7. Which of the following is correct?
A. A calendar spread can be created by buying a call and selling a put when the
strike prices are the same and the times to maturity are different
B. A calendar spread can be created by buying a put and selling a call when the
strike prices are the same and the times to maturity are different
C. A calendar spread can be created by buying a call and selling a call when the
strike prices are different and the times to maturity are different
D. A calendar spread can be created by buying a call and selling a call when the
strike prices are the same and the times to maturity are different
Answer: D
A calendar spread is created by buying an option with one maturity and selling an
option with another maturity when the strike prices are the same and the option
types (calls or puts) are the same.
/
Chapter 12: Trading Strategies Involving Options
Multiple Choice Test Bank: Questions with Answers
1. Which of the following creates a bull spread?
A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
Answer: A
A bull spread is created by buying a low strike call and selling a high strike call.
Alternatively, it can be created by buying a low strike put and selling a high strike put.
2. Which of the following creates a bear spread?
A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
Answer: B
A bear spread is created by buying a high strike call and selling a low strike call.
Alternatively, it can be created by buying a high strike put and selling a low strike put.
3. Which of the following creates a bull spread?
A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
Answer: A
A bull spread is created by buying a low strike call and selling a high strike call.
Alternatively, it can be created by buying a low strike put and selling a high strike put.
4. Which of the following creates a bear spread?
A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
Answer: B
A bear spread is created by buying a high strike call and selling a low strike call.
/
, Hull: Options, Futures, and Other Derivatives, Ninth Edition
Chapter 12: Trading Strategies Involving Options
Multiple Choice Test Bank: Questions with Answers
Alternatively, it can be created by buying a high strike put and selling a low strike put.
5. What is the number of different option series used in creating a butterfly spread?
A. 1
B. 2
C. 3
D. 4
Answer: C
Three different options all with the same maturity are involved in creating a butterfly
spread. The strike prices are usually equally spaced. The creator buys the low strike
option, buys the high strike option, and sells two of the intermediate strike option
6. A stock price is currently $23. A reverse (i.e short) butterfly spread is created from
options with strike prices of $20, $25, and $30. Which of the following is true?
A. The gain when the stock price is greater than $30 is less than the gain when the
stock price is less than $20
B. The gain when the stock price is greater than $30 is greater than the gain when
the stock price is less than $20
C. The gain when the stock price is greater than $30 is the same as the gain when
the stock price is less than $20
D. It is incorrect to assume that there is always a gain when the stock price is
greater than $30 or less than $20
Answer: C
The gain from a very high stock price or a very low stock price is the same. Suppose
calls are used. In the case of a very low stock price none are exercised and the gain
is c1+c3−2c2 from the option premium. In the case of a very high stock price all
options are exercised. The net payoff is zero and the gain is the same.
7. Which of the following is correct?
A. A calendar spread can be created by buying a call and selling a put when the
strike prices are the same and the times to maturity are different
B. A calendar spread can be created by buying a put and selling a call when the
strike prices are the same and the times to maturity are different
C. A calendar spread can be created by buying a call and selling a call when the
strike prices are different and the times to maturity are different
D. A calendar spread can be created by buying a call and selling a call when the
strike prices are the same and the times to maturity are different
Answer: D
A calendar spread is created by buying an option with one maturity and selling an
option with another maturity when the strike prices are the same and the option
types (calls or puts) are the same.
/
