Apply Option Strategies - Series 7

1. What is the maximum loss for a protective put at expiration?

   Stock cost minus strike + premium. Downside is limited as the put allows selling at strike, with loss equaling cost above strike plus premium paid.

2. What is the maximum gain formula for any credit vertical spread at expiration?

   Net credit received. For credit spreads, maximum profit is the net premium received if the spread expires worthless.

3. What is the maximum loss for a long put at expiration?

   Premium paid. The option expires worthless if the stock price is above the strike, resulting in loss of the full premium.

4. What market outlook best fits a long straddle?

   Volatility: expects a large move in either direction. This strategy profits from high volatility, as a large stock price swing beyond breakeven points yields gains.

5. What strategy is created by short call and short put with same strike and expiration?

   Short straddle. Selling both a call and put with identical strike and expiration profits if the stock remains stable near the strike.

6. What is the maximum loss for a short straddle at expiration?

   Unlimited (up) and substantial (down to $0$). Unlimited loss occurs if stock rises sharply (from call), and substantial loss if it falls to zero (from put).

7. What position defines a protective put (married put)?

   Long stock + long put on same stock. This strategy protects the long stock position against downside risk by allowing sale at the put's strike price.

8. What is the maximum loss for a long straddle at expiration?

   Total premiums paid. If the stock closes at the strike, both options expire worthless, resulting in loss of both premiums paid.

9. What is the maximum gain for a short (naked) call at expiration?

   Premium received. The option expires worthless if the stock is below the strike, allowing retention of the full premium received.

10. What position defines a covered call?

    Long stock + short call on same stock. This combination provides income from the premium while holding the underlying stock to cover potential exercise.

11. What is the maximum gain for a long call at expiration?

    Unlimited upside. The stock price can rise indefinitely, allowing the call option's value to increase without limit at expiration.

12. What is the maximum gain for a short (naked) put at expiration?

    Premium received. The option expires worthless if the stock is above the strike, allowing retention of the full premium received.

13. What is the maximum loss for a covered call at expiration?

    Stock cost minus premium (if stock goes to $0$). If the stock falls to zero, the position loses the cost basis reduced only by the premium received.

14. What is the maximum loss for a long call at expiration?

    Premium paid. If the option expires worthless when the stock price is below the strike, the entire premium paid is lost.

15. What is a bull call spread (debit call spread) position?

    Long lower-strike call + short higher-strike call. This debit spread profits from a moderate rise in stock price, with limited risk and reward based on strike difference.

16. What is the maximum loss for a short (naked) call at expiration?

    Unlimited. If the stock rises indefinitely above the strike, the loss on the short call position has no upper bound.

17. What is the maximum gain for a covered call at expiration?

    Premium + $(\text{strike} - \text{stock cost})$. If exercised, the stock is sold at strike, yielding premium plus any appreciation from cost basis to strike.

18. What is the maximum loss for a short (naked) put at expiration?

    Substantial: strike minus premium (if stock goes to $0$). If the stock falls to zero, the put is exercised, requiring purchase at strike with loss mitigated only by premium.

19. What is the maximum loss formula for any debit vertical spread at expiration?

    Net debit paid. The worst case for debit spreads is both legs expiring worthless or fully offsetting, losing the net premium paid.

20. What is the maximum gain for a long put at expiration?

    Strike minus premium (if stock goes to $0$). Profit maximizes when the stock falls to zero, equaling the strike price minus the premium paid for the put.

21. What is a bear put spread (debit put spread) position?

    Long higher-strike put + short lower-strike put. This debit spread profits from a moderate decline in stock price, with limited risk and reward based on strike difference.

22. What is the maximum gain for a short straddle at expiration?

    Total premiums received. If the stock closes at the strike, both options expire worthless, allowing retention of both premiums received.

23. What strategy is created by long call and long put with same strike and expiration?

    Long straddle. Buying both a call and put with identical strike and expiration bets on significant price movement in either direction.

24. What is the maximum loss formula for any credit vertical spread at expiration?

    $(\text{strike difference}) - (\text{net credit})$. For credit spreads, maximum loss equals the difference in strikes minus the net premium received.

25. What is the maximum gain formula for any vertical spread at expiration?

    $(\text{strike difference}) - (\text{net debit})$. For debit spreads, maximum profit equals the difference in strikes minus the net premium paid to establish the position.

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