Options Trading Millionaires Test 1 — Questions and Answers
Question 1: Assume Nifty is at 4450 on April 27. Mr. Charles, an investor, engages in a short straddle by selling a May 4500 Nifty call for 122 rupees and a May 4500 Nifty put for 85 rupees. What will Mr. Charles' net profit be if the Nifty closes at 5000?
- 0
- 93
- -293 (Correct answer)
- Unlimited
Correct answer: -293
A short straddle involves selling both a call and a put option with the same strike price and expiration. Mr. Charles received a total premium of 122 (call) + 85 (put) = 207 rupees. If Nifty closes at 5000, the May 4500 put expires worthless, retaining its 85 premium. The May 4500 call is in-the-money, resulting in a loss of (5000 - 4500) - 122 = 500 - 122 = 378 rupees. The net profit/loss is 85 (put premium) - 378 (call loss) = -293 rupees.
Question 2: Assume that in May, Nifty stands at 4500. Mr. Niel, an investor, executed a short strangle by selling a Rs. 7000 Nifty call for Rs. 43 and a Rs. 4300 Nifty point for Rs. 23 in premium. Give Mr. Neil's break-even point.
- 4766, 4234 (Correct answer)
- 4500, 4210
- 4710, 4821
- 4560, 4300
Correct answer: 4766, 4234
A short strangle involves selling an out-of-the-money call and an out-of-the-money put. Mr. Neil received a total premium of 43 (call) + 23 (put) = 66 rupees. The upper break-even point is calculated as Call Strike Price + Total Premium, and the lower break-even point is Put Strike Price - Total Premium. Assuming the call strike was intended to be 4700 (to match the answer, as 7000 would yield a different result), the break-even points are 4700 + 66 = 4766 and 4300 - 66 = 4234.
Question 3: Which markets are a short call condor appropriate for?
- Bearish only markets
- Highly volatile markets (Correct answer)
- Low volatility markets
- All of the options are correct
Correct answer: Highly volatile markets
A short call condor (or short iron condor) is a strategy designed to profit from low volatility, as it benefits when the underlying asset's price remains within a specific range. It involves selling two options and buying two further out-of-the-money options to cap risk. Highly volatile markets would be appropriate for a long call condor, which profits from significant price movements, making 'Low volatility markets' the correct environment for a short call condor.
Question 4: Mr. John shorts ABC Ltd. and invests the same amount in call options on the company. He has come up with a ________ plan.
- Long strangle
- Protective Call (Correct answer)
- Short straddle
- All of the options are correct
Correct answer: Protective Call
A protective call strategy involves shorting a stock and simultaneously buying call options on the same company. This combination hedges the short stock position, as the purchased call options gain value if the stock price rises, thereby limiting the potential losses from the short sale. It acts as a form of insurance against an unexpected upward movement in the stock price.
Question 5: The risk with the collar strategy is _________.
- Limited (Correct answer)
- Unlimited
- Limited to premium received on call
- None of the options are correct
Correct answer: Limited
A collar strategy involves holding a long stock position, buying a put option, and selling a call option. The put option limits the downside risk of the stock, while the sold call option limits the upside profit potential. Consequently, both the maximum potential loss and maximum potential gain for the entire strategy are defined and limited.
Question 6: Indicate whether or not the following is true. "In a short straddle, an investor sells calls and puts with the same maturity but different strike prices on the same stock or index.
- True
- False (Correct answer)
Correct answer: False
The statement is false. In a short straddle, an investor sells a call and a put option with the *same strike price* and the same maturity date on the same underlying asset. If the strike prices were different, it would describe a short strangle, not a short straddle.
Question 7: What will a call option's intrinsic value be given that it has an underlying deposit of Rs. 100,000, a strike price of 97.5, and an interest rate of 2.5% per annum?
- Zero
- Positive
- Negative
- None of the options are correct (Correct answer)
Correct answer: None of the options are correct
A call option's intrinsic value is calculated as the maximum of zero or (Underlying Price - Strike Price). The given information includes an 'underlying deposit' and an interest rate, neither of which directly represents the current underlying asset's price needed for this calculation. Since the actual current price of the underlying asset is not provided, the intrinsic value cannot be determined from the given information, making 'None of the options are correct' the appropriate choice.
Options Trading Millionaires Test 1
Assume Nifty is at 4450 on April 27.
Mr.
Charles, an investor, engages in a short straddle by selling a May 4500 Nifty call for 122 rupees and a May 4500 Nifty put for 85 rupees.
What will Mr.
Charles' net profit be if the Nifty closes at 5000?