Quiz for Chapter 5 : Strategies using equity future and equity options

Chapter 5: Trading Strategies - 35 Solved MCQs

🧠 STRATEGY MASTERCLASS:

This chapter tests your ability to combine Futures and Options. Focus on Spreads, Straddles, and Hedge Ratios. Click to reveal the math!

1. Which strategy is used to hedge the price risk of a planned future sale of a stock?

A) Long hedge using stock futures
B) Short hedge using stock futures
C) Long hedge using index futures
D) Short hedge using index futures

View Answer & Logic

Answer: B) Short hedge using stock futures

Explanation: To protect against a price fall in an asset you plan to sell, you "lock in" the price by selling (shorting) futures today.

2. Index futures can be used to hedge the systematic risk of a well-diversified portfolio. True or False?

View Answer & Logic

Answer: True

Explanation: Systemic risk (market-wide risk) is best hedged using broad market indices like Nifty or Sensex.

3. Plan to sell 1500 shares. Initial short at Rs. 800. If price at expiry is Rs. 905, what is the P&L on the short futures?

A) Rs. 1,57,500 Loss
B) Rs. 1,55,000 Profit
C) Rs. 1,59,000 Loss
D) Rs. 1,58,250 Profit

View Answer & Logic

Answer: A) Rs. 1,57,500 Loss

Math: (905 - 800) * 1500 = 105 * 1500 = 1,57,500. Since price rose, the short position loses money.

4. Portfolio Value 1 Cr, Beta 1.5. Index at 18000 (Lot 50). How many contracts to short?

A) 15.5
B) 16.67
C) 18.89
D) 20.33

View Answer & Logic

Answer: B) 16.67

Math: (1,00,00,000 * 1.5) / (18000 * 50) = 15,000,000 / 900,000 = 16.67 contracts.

5. Stock falls from 1595 to 1520. Futures fall from 1602 to 1527. Gain on 550 short futures?

A) Rs. 45,100
B) Rs. 41,250
C) Rs. 35,200
D) Rs. 37,950

View Answer & Logic

Answer: B) Rs. 41,250

Math: (1602 - 1527) * 550 = 75 * 550 = 41,250 gain.

6. In a diagonal spread, the options have:

A) Same strike, same expiry
B) Same strike, different expiry
C) Different strike, same expiry
D) Different strike, different expiry

View Answer & Logic

Answer: D) Different strike, different expiry

7. Primary purpose of using futures for arbitrage?

A) To speculate on directional moves
B) To generate extra dividend income
C) To exploit price differences between cash and futures markets
D) To avoid paying margins

View Answer & Logic

Answer: C) To exploit price differences between cash and futures markets

8. BEP for Bear Put Spread (Long Put 18000 @ 200, Short Put 17500 @ 75)?

A) 17725
B) 17800
C) 17825
D) 17675

View Answer & Logic

Answer: C) 17825

Math: High Strike (18000) - Net Premium (200 - 75) = 18000 - 125 = 17825.

9. Combination for a bearish vertical spread using calls?

A) Short lower strike call + Long higher strike call
B) Long lower strike call + Short higher strike call
C) Long lower strike put + Short higher strike put
D) Short lower strike put + Long higher strike put

View Answer & Logic

Answer: A) Short lower strike call + Long higher strike call

Explanation: This is a Bear Call Spread. You sell the expensive ITM/ATM call and buy a cheap OTM call.

10. ________ involves options with same strike but different expiry?

A) Diagonal spread
B) Vertical spread
C) Butterfly Spread
D) Horizontal spread

View Answer & Logic

Answer: D) Horizontal spread (also called Calendar Spread)

11. Why are calendar spread opportunities rare?

A) Low liquidity
B) Too complex for software
C) Mispricing is quickly corrected by arbitrageurs
D) High taxes

View Answer & Logic

Answer: C) Mispricing is quickly corrected by arbitrageurs

12. Reverse cash-and-carry arbitrage is profitable when:

A) Cost of carry is high
B) Futures price < Fair value (Undervalued)
C) Stock is expected to fall
D) Futures price > Cash price

View Answer & Logic

Answer: B) Futures price is lower than the fair value based on cost of carry

13. Cash-and-carry arbitrage involves:

A) Buying stock + Selling futures
B) Selling stock + Buying futures
C) Buying futures only
D) Selling futures only

View Answer & Logic

Answer: A) Buying a stock in the cash market and selling a futures contract

14. Primary benefit of diagonal spread over vertical?

A) Zero risk
B) Highest profit
C) Flexibility with both strike and expiry
D) Lowest brokerage

View Answer & Logic

Answer: C) It allows for greater flexibility with strike prices and expiration dates.

15. Calendar spread involves contracts for the same asset but:

A) Same expiry
B) Different expiry dates
C) Different strike prices
D) Different exchanges

View Answer & Logic

Answer: B) Different expiry dates

16. Principal rule for calendar spread arbitrage:

A) Buy high, sell low
B) Buy underpriced, sell overpriced
C) Only buy near-month
D) Only sell far-month

View Answer & Logic

Answer: B) Buy the underpriced futures and sell the overpriced futures.

17. Bull Put Spread (Short 18000 @ 200, Long 17500 @ 75). Max Loss?

A) Rs. 225
B) Rs. 275
C) Rs. 375
D) Rs. 250

View Answer & Logic

Answer: C) Rs. 375

Math: Difference in Strikes (500) - Net Premium Received (125) = 375.

18. BEPs for Long Straddle (Strike 6000, Total Premium 393)?

A) 6393 and 5607
B) 6387 and 5613
C) 6400 and 5600
D) 6399 and 5601

View Answer & Logic

Answer: A) 6393 and 5607

Math: 6000 + 393 = 6393; 6000 - 393 = 5607.

19. True for short straddle strategy:

A) Limited profit, unlimited loss
B) Unlimited profit, unlimited loss
C) Limited profit, limited loss
D) Unlimited profit, limited loss

View Answer & Logic

Answer: A) Limited profit (premium), unlimited potential loss

20. Primary objective of a covered call?

A) Massive speculation
B) Hedge against total crash
C) Generate extra income from existing holdings
D) Arbitrage

View Answer & Logic

Answer: C) Generate extra income from existing stock holdings

21. Max profit in Covered Call (Buy stock @ 1890, Sell 1900 Call @ 20)?

A) Rs. 20
B) Rs. 100
C) Rs. 50
D) Rs. 30

View Answer & Logic

Answer: D) Rs. 30

Math: (Strike 1900 - Buy 1890) + Premium (20) = 10 + 20 = 30.

22. Strategy used to limit BOTH potential profit and loss:

A) Long straddle
B) Covered call
C) Butterfly Spread
D) Short strangle

View Answer & Logic

Answer: C) Butterfly Spread

23. Key difference between Collar and Covered Call?

A) Collar limits both upside/downside, Covered call only upside
B) No difference
C) Covered call is safer
D) Collar is purely speculative

View Answer & Logic

Answer: A) Collars limit both upside and downside risks

24. Known as a 'synthetic long call'?

A) Long straddle
B) Short strangle
C) Protective put
D) Covered call

View Answer & Logic

Answer: C) Protective put

25. Similarity between Protective Put and Long Call?

A) Unlimited loss
B) Limited profit
C) Unlimited profit potential with limited loss
D) High theta decay

View Answer & Logic

Answer: C) Both have unlimited profit potential with limited loss.

26. Stock at 1200. Long stock @ 1000 + Protective Put (Strike 1000 @ 15). Net position?

A) Rs. 195
B) Rs. 215
C) Rs. 185
D) Rs. 200

View Answer & Logic

Answer: C) Rs. 185

Math: Profit on Stock (200) - Premium paid (15) = 185.

27. Put-call ratio is primarily used as:

A) Calculation of IV
B) Trend multiplier
C) Contrarian indicator for market sentiment
D) Dividend tracker

View Answer & Logic

Answer: C) To serve as a contrarian indicator for market sentiment

28. Delta-hedging is primarily used to:

A) Maximize Theta
B) Predict Gamma scalps
C) Manage and mitigate risk in option positions
D) Avoid paying taxes

View Answer & Logic

Answer: C) To manage and mitigate risk in option positions.

29. Price Rising + Open Interest Increasing indicates:

A) Short covering
B) Bearish trend
C) Bullish trend
D) Long liquidation

View Answer & Logic

Answer: C) Bullish trend

30. Increase in IV impacts price how?

A) Decreases both Calls/Puts
B) Increases both Calls/Puts
C) Increases Calls, Decreases Puts
D) No impact

View Answer & Logic

Answer: B) Increases the price of both calls and puts

31. Put-call parity state relates the price of:

A) Calls vs underlying
B) European calls and puts with same strike/expiry
C) Futures vs Spot
D) American vs European options

View Answer & Logic

Answer: B) Relationship between European calls and puts

32. Bearish vertical spread using calls. Payoff if price < lower strike?

A) Net premium received
B) Net premium paid
C) Zero
D) Unlimited loss

View Answer & Logic

Answer: A) Net premium received (options expire worthless)

33. NOT a characteristic of a vertical spread?

A) Same expiry
B) Same type (calls or puts)
C) Different strikes
D) Only for calls

View Answer & Logic

Answer: D) Can only be constructed using calls (False, Puts also used)

34. Price Falling + Open Interest Increasing indicates:

A) Bullish
B) Short covering
C) Bearish trend
D) Market closing

View Answer & Logic

Answer: C) Bearish trend (Short build-up)

35. A PCR < 1 usually indicates:

A) Bullish trend
B) Bearish trend
C) Rangebound market
D) No trade zone

View Answer & Logic

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Dhaval Visariya

AMFI Registered Distributor (ARN-327925) | Software Developer & Finance Enthusiast

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