# Option Tier 2 Exam wrong answer?



## malcolml (3 April 2009)

Hi, this is a test i need to do on westpac broking before i can use T2 strategies like straddles. I believe i have done at least 9 of them correctly, but the system said my answers are not all correct, can anyone tell me which question I answered wrong? *I am not asking for answers*, please point out the wrongly answered questions (e.g "5 isn't correct") and I will fix them myself.

Thank you 

Question 1 


You hold the following Option position for BHP Limited (BHP):

Short 20 BHP June $38.00 Calls.

The share price of BHP rises from $38 to $39.

Which of the following statements is correct? 

X  a) The margin required for this position will increase
  b) The margin required for this position will decrease
  c) The margin required for this position will be the same
  d) No margins apply to this position  

A, The margin required will increase since it's a short call position, increase in price increases the 
likehood of the option being execrised before or on expiry date, therefore giving the writer more liability.
Short Call= Obligation to buy stocks at certain price.
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Question 2

You enter the following Option position for Lihir Gold (LGL):

Short 1 LGL June $4.50 Call for 10c (Contract size = 1,000)

You are exercised on the expiry day in June. The following day, LGL is trading at $4.75.

What is your total profit / loss if you buy the shares at market price to cover your obligation (excluding brokerage and ACH charges)? 

  a) Break even
X  b) $150 loss
  c) $250 loss
  d) $350 profit  

Short Call= Obligation to buy at current price and deliver at $4.50
Liability when exercised: (4.75-4.50+0.1)x1000= $150 LOSS
0.1 is premium received on writing.
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Question 3

If additional margin is needed to cover a position, Westpac Broking can: 

X  a) Call you to lodge more stock or cash to cover the obligation
  b) Automatically lodge cash or stock on your behalf with the ACH
  c) Automatically sell shares you hold to cover the obligation
  d) All of the above  

A
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Question 4

All else remaining constant an increase in volatility for the underlying security leads to: 

  a) Lower option premiums
X  b) Higher option premiums
  c) Flat option premiums
  d) Lower strike prices  
B, Premium increases as volatility increases
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Question 5

What is the total premium paid for the following Option order in the S&P/ASX200 Index (XJO), assuming an Index Multiplier of $10?

Long 1 XJO June 5000 Call @ 100 points 

  a) $100
X  b) $1,000
  c) $1,100
  d) $2,000  
One contract, 10x100= $1000, so it's B
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Question 6

Which of the following strategies would require a margin to be lodged? 

  a) Bull Put spread
  b) Bull Call spread
  c) Bear Put spread
X  d) All of the above strategies  

D, All of them
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Question 7

You hold the following Bull Call spread position in Woolworths (WOW):

Long 5 WOW August $29.00 Calls @ $3.00
Short 5 WOW August $31.00 Calls @ $0.50

What is the most likely outcome if you only close (sell) the $29 August Call series? : 

  a) You will make a profit on the strategy
  b) You will make a loss on the strategy
X  c) You will now be required to pay a margin
  d) You will now no longer be required to pay a margin  
C, because it will cause the bull call spread to turn into an uncovered short call.
============================================================
Question 8

Which of the following is not a valid Option strategy? 

  a) Bull Call spread
X  b) Ratio Bear Condor
  c) Bull Put spread
  d) Straddle  

B, Not possible.
============================================================
Question 9

If you are exercised on a Short Call position and don't hold the stock you will be required to: 

  a) Substitute cash for stock
X  b) Purchase the stock immediately after you are notified of the exercise
  c) Make arrangements to purchase the stock the following week
  d) Do nothing  
B
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Question 10

You enter the following strategy for Telstra (TLS):

Buy 1 TLS May $4.25 Call @ $0.25
Sell 1 TLS May $4.50 Call @ $0.10

At what net price would the strategy be entered into the market? 

  a) $0.35 Debit
X  b) $0.15 Debit
  c) $0.35 Credit
  d) $0.15 Credit  

B

Buy 1 TLS May $4.25 Call @ $0.25 = 0.25x1000= $250 Cost
Sell 1 TLS May $4.50 Call @ $0.10 = 0.10x1000= $100 Profit
100+(-250)= -150

-150/1000=0.15
Therefore it's $0.15 Debit
============================================================


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## jackson8 (3 April 2009)

hi there 

i would be looking at question no. 6

just have a think about each strategy separately and check this site out . it is one of many available on the web 

C:\Users\Gary\Documents\strageties\optionstragetys\complete strageties.mht

or asx pdf 
http://www.asx.com.au/markets/pdf/UnderstandingStrategies.pdf


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## sails (3 April 2009)

I had a quick look too - agree with Jackson8 that No. 6 is not correct as only one of those strategies requires margin.

Jackson8 - one of the links in your last post is linked to your C drive so nothing shows up!


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## jackson8 (3 April 2009)

sails said:


> I had a quick look too - agree with Jackson8 that No. 6 is not correct as only one of those strategies requires margin.
> 
> Jackson8 - one of the links in your last post is linked to your C drive so nothing shows up!




yeah thanks sails

proper link is 
http://www.optiontradingpedia.com/options_strategy_library.htm

other was a saved page to disk

how did it go malcolml ?


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## kbxk508 (4 April 2009)

malcolml said:


> Hi, this is a test i need to do on westpac broking before i can use T2 strategies like straddles. I believe i have done at least 9 of them correctly, but the system said my answers are not all correct, can anyone tell me which question I answered wrong? *I am not asking for answers*, please point out the wrongly answered questions (e.g "5 isn't correct") and I will fix them myself.
> 
> ============================================================




malcolm, I think Q10 is incorrect

kbxk508


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## sails (4 April 2009)

kbxk508 said:


> malcolm, I think Q10 is incorrect
> 
> kbxk508




kbxk508,  the question asked "At what net price would the strategy be entered into the market?".  I think he is correct at 15c debit.

The order would be entered as follows:
Buy 1 TLS May $4.25 Call  and Sell 1 TLS May $4.50 Call for a net debit of 15c

Yes, please let us know how you get on, Malcolm


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## aussiepipe (4 April 2009)

malcolm,

I would look at question 3 and question 6.

hope it works out. it was a frustrating experience for me.

cheers


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## sails (4 April 2009)

aussiepipe said:


> malcolm,
> 
> I would look at question 3 and question 6.
> 
> ...




You may be right on No 3, Aussiepipe.   That question could be broker specific.


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## kbxk508 (5 April 2009)

sails said:


> kbxk508,  the question asked "At what net price would the strategy be entered into the market?".  I think he is correct at 15c debit.
> 
> The order would be entered as follows:
> Buy 1 TLS May $4.25 Call  and Sell 1 TLS May $4.50 Call for a net debit of 15c
> ...


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## sails (5 April 2009)

kbxk508 said:


> ...oops! thanks sails - confused taking a short position vs selling a short call
> 
> kbxk508




No worries!  Options can be pretty confusing at times...


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## Grinder (5 April 2009)

Had alittle look... 6 stood out and 3 was a bit iffy on 3.


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## cutz (5 April 2009)

G'Day,

Regarding question 3,

I've got a commsec account and they can automatically withdraw cash from my account, secure more stock and automatically sell/buy stock so i assume all of the above is the correct answer.


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## malcolml (7 April 2009)

Thanks for all of your assistance, I just passed the test.
And the problem was with 3 and 6, i wasn't awared that bull put only 'reduce' margin while not covering it completely. 3 was broker specific, and for Westpac D was the answer.


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## sails (7 April 2009)

Well done, Malcolm  
At least they are trying to make sure you understand the basics!


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