Deck 9: Mechanics of Options Markets

Question 1

A trader writes two naked put option contracts. The option price is $3, the strike price is $40 and the stock price is $42. What is the initial margin? _ _ _ _ _ _

Answer 1

$1880

Question 2

Which of the following led to BHP issuing more shares? choose three)

A) Some executive stock options were exercised.
B) Some exchange-traded put options were exercised.
C) Some exchange-traded call options were exercised.
D) Some warrants on BHP were exercised.
E) Some of BHP's convertible debt was converted into equity.

Answer 2

Some executive stock options were exercised.
Some warrants on BHP were exercised.
Some of BHP's convertible debt was converted into equity.

Question 3

Supposed that the investor also writes a one-year European call option on the same stock with the same strike price as calculated above. The price of the call option is $5. Draw a diagram illustrating how the investor's profit or loss varies with the terminal stock price.

Answer 3

Question 4

Consider an exchange traded put option to sell 100 shares for $20. Give
i) A 5 for 1 stock split a) _ _ _ _ _ _ b) _ _ _ _ _ _
ii) A 25% stock dividend a) _ _ _ _ _ _ b) _ _ _ _ _ _

iii) A $5 cash dividend a) _ _ _ _ _ _ b) _ _ _ _ _ _