Series 7 Exam Question 337: Answer and Explanation

Question: 337

Marty Martinez wants to create a short combination using his existing option. If Marty is short 1 DEF Aug 60 call, which of the following option positions should Marty purchase or sell?

• A. Long 1 DEF Aug 70 put
• B. Long 1 DEF Aug 60 put
• C. Short 1 DEF Aug 50 put
• D. Short 1 DEF Aug 60 put

Correct Answer: C

Explanation:

C. To create a short combination, Marty has to sell a call and sell a put on the same stock with different expiration months and/or strike prices. Because you need to have two sells to create a short combination, you can cross off Choices (A) and (B). The difference between a straddle and a combination is in the expiration months and the strike prices. If the expiration months are the same and the strike prices are the same, you have a straddle. If the expiration months and/or the strike prices are different, you're looking at a combination.