Deck 15: Stock Options

Question 1

Which of the following has the obligation to purchase stock at the strike price when an option is exercised?

A)call holder
B)call writer
C)put holder
D)put writer
E)call writer and put holder

Answer 1

D

Question 2

A cash-settled option is defined as an option that ________

A)requires a cash deposit upon purchase.
B)has a foreign currency as its underlying asset.
C)has the U.S. dollar at its underlying asset.
D)is settled by a cash payment to the option holder upon exercise.
E)offers the option to either deliver the underlying asset or a cash payment.

Answer 2

D

Question 3

Which one of the following distinguishes an option as an American style option?

A)option that grants its holder the right to purchase at the strike price
B)option that grants its holder the right to sell at the strike price
C)option that obligates its holder to sell at the strike price
D)option that can be exercised at any time prior to expiration
E)option that can only be exercised at expiration

Answer 3

D

Question 4

Which one of the following is defined as the price at which an option will be exercised?

A)straddle
B)spread
C)strike
D)market
E)underlying

Question 5

An option that would not yield a positive payoff if exercised today is referred to by which one of the following terms?

A)hollow option
B)zero option
C)in-the-cellar option
D)out-of-the-money option
E)strike-out option

Question 6

You currently own 200 shares of Amazon stock. If you purchase options on this stock to guard against future declines in the price of the stock you are implementing which one of the following?

A)covered call
B)naked call
C)protective put
D)bear spread
E)straddle

Question 7

Selling a call option on stock which you own is referred to as which one of the following strategies?

A)covered call
B)naked call
C)protective put
D)underlying put
E)straddle

Question 8

Kathy implemented an option trading strategy consisting of two call options. This strategy is known as which one of the following?

A)spread
B)straddle
C)split
D)combination
E)counteraction

Question 9

Which one of the following terms is defined as the payoff that would be received if an option were expiring immediately?

A)parity price
B)market price
C)time value
D)underlying value
E)intrinsic value

Question 10

Which one of the following terms is defined as an option that would have a positive payoff if exercised now?

A)in-the-money option
B)out-of-the-money option
C)straddle option
D)crossed option
E)cash-settled option

Question 11

Which of the following has the obligation to sell a stock at the strike price when an option is exercised?

A)call holder
B)call writer
C)put holder
D)put writer
E)call holder and put writer

Question 12

By definition, a put option grants its owner which one of the following?

A)right to buy
B)obligation to buy
C)right to sell
D)obligation to sell
E)choice to either buy or sell

Question 13

Which one of the following is defined as an option that can only be exercised at expiration?

A)European style option
B)in-the-money option
C)out-of-the-money option
D)American style option
E)derivative option

Question 14

Which one of the following is equal to the option price minus the intrinsic value?

A)parity value
B)payoff value
C)option time value
D)strike value
E)profit

Question 15

Which one of the following refers to selling an option contract?

A)calling
B)writing
C)exercising
D)striking
E)spotting

Question 16

By definition, stock index options would include an option on which one of the following underlying assets?

A)gold
B)corn
C)U.S. dollar
D)S&P 500
E)U.S. Treasury bill

Question 17

Which one of the following guarantees that the terms of an exchange-listed option contract are fulfilled when an option is exercised?

A)Securities and Exchange Commission
B)Federal Reserve
C)New York Options Exchange
D)Options Clearing Corporation
E)Securities Investors Protection Corporation

Question 18

A call option grants its owner which one of the following?

A)right to buy
B)obligation to buy
C)right to sell
D)obligation to sell
E)choice to either buy or sell

Question 19

A list of available option contracts and their prices for a particular security listed in order of strike price and maturity date is referred to as which one of the following?

A)value chain
B)intrinsic list
C)option chain
D)strike list
E)exercise price display

Question 20

An option trading strategy that utilizes both put and call options is referred to as which one of the following?

A)bull call spread
B)butterfly spread
C)split
D)combination
E)counteraction

Question 21

Which of the following characteristics are correct regarding the old style option quotation system?
I. The system is known as OPRA - the Options Price Reporting Authority code.
II. The system has 3 data elements.
III. The system has 21 characters.
IV. The system has 5 characters.
V. The system is known as the OCC Series Key.
VI. The root symbol is the underlying stock's ticker symbol.

A)I, II, III, and VI
B)II, III, IV, and V
C)I, II, and IV
D)II, III, V, and VI
E)III, V, and VI

Question 22

Which one of the following combinations creates an in-the-money option?

A)underlying stock price is less than the strike price of a call
B)underlying stock price is $18 and the put has an exercise price of $15
C)underlying stock price is $22 and the call has an exercise price of $25
D)put strike price exceeds the underlying stock price
E)put price is equal to the call price

Question 23

Consider both a European put and call that expire in December and have strike prices of $25. The no-arbitrage relationship between this put and call is referred to as which one of the following?

A)intrinsic equilibrium
B)Euro match
C)bull-call spread
D)butterfly spread
E)put-call parity

Question 24

What is the current price per underlying share if you wish to buy a June $32.50 call option on General Electric stock?
$\text { General Electric }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{rrrrrr}\operatorname{Exp} & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { Jun } & 32.50 & .68 & .70 & .70 & .73 \\\text { Sep } & 32.50 & 1.60 & 1.62 & 1.64 & 1.68 \\\text { Jun } & 34.00 & .18 & .19 & 1.73 & 1.77 \\\text { Sep } & 34.00 & .93 & .95 & 2.52 & 2.56\end{array}$

A)$.68
B)$.70
C)$.73
D)$1.60
E)$1.62

Question 25

You are buying the June call on General Electric stock at $.19. What amount will you pay per share if you decide to exercise this option?
$\text { General Electric }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{rrrrrr}\operatorname{Exp} & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { Jun } & 32.50 & .68 & .70 & .70 & .73 \\\text { Sep } & 32.50 & 1.60 & 1.62 & 1.64 & 1.68 \\\text { Jun } & 34.00 & .18 & .19 & 1.73 & 1.77 \\\text { Sep } & 34.00 & .93 & .95 & 2.52 & 2.56\end{array}$

A)$32.50
B)$32.69
C)$33.81
D)$34.00
E)$34.19

Question 26

A decrease in which one of the following will increase the intrinsic value of a put option?

A)strike price
B)exercise price
C)option premium
D)time value
E)underlying stock price

Question 27

What is the maximum percentage loss you can incur if you buy a put option?

A)0%
B)10%
C)100%
D)1,000%
E)unlimited percentage

Question 28

You bought a put with a strike price of $35. The current stock price is $34. What is the current payoff value of this option?

A)−$2
B)−$1
C)$0
D)$1
E)$2

Question 29

Which of the following characteristics are correct regarding the new style option quotation system?
I. The system is known as OPRA - the Options Price Reporting Authority code.
II. The system has 3 data elements.
III. The system has 21 characters.
IV. The system has 5 characters.
V. The system is known as the OCC Series Key.
VI. The root symbol is the underlying stock's ticker symbol.

A)I, II, III, and VI
B)II, III, IV, and V
C)I, II, and IV
D)II, III, V, and VI
E)III, V, and VI

Question 30

Which one of the following statements is true?

A)A call with a strike price of $25 and a stock price of $23 has positive intrinsic value.
B)A European style option is more valuable than an American style option.
C)An American style out-of-the-money call option can have a positive value.
D)A $40 put option has more intrinsic value than a $50 put option on the same underlying asset.
E)The time value of an option is equal to the intrinsic value minus the option premium.

Question 31

You wrote a $40 call option on a stock that has a market price of $43. Which one of the following statements must be correct if the option expires three months from now?

A)Your option currently has zero intrinsic value.
B)Your option currently has a negative payoff.
C)You have the right to purchase shares at $40 a share.
D)Your option payoff will increase if the market price of the stock increases.
E)If the market price remains stable, you will make the decision to exercise this option prior to expiration.

Question 32

The maximum option payoff from:

A)writing a put is $0.
B)buying a put is $0.
C)writing a call is an unlimited profit.
D)buying a call is the strike price.
E)writing a call is the stock price.

Question 33

Which one of the following statements is correct?

A)Reduced Value index options are equal in size to one percent of the standard index option.
B)The holder of a stock index put option is betting that the underlying index will increase in value.
C)Most index options are traded on the New York Options Exchange.
D)The contract size for a call option on the S&P 500 is 10 times the index.
E)Some stock index options close in the morning while others close at the end of the trading day.

Question 34

At what price will a dealer sell the Jun $34 put on General Electric stock?
$\text { General Electric }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{rrrrrr}\operatorname{Exp} & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { Jun } & 32.50 & .68 & .70 & .70 & .73 \\\text { Sep } & 32.50 & 1.60 & 1.62 & 1.64 & 1.68 \\\text { Jun } & 34.00 & .18 & .19 & 1.73 & 1.77 \\\text { Sep } & 34.00 & .93 & .95 & 2.52 & 2.56\end{array}$

A)$1.64
B)$1.73
C)$1.77
D)$2.52
E)$2.56

Question 35

How much option premium per share will you receive if you sell a September $34 put on General Electric stock?
$\text { General Electric }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{rrrrrr}\operatorname{Exp} & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { Jun } & 32.50 & .68 & .70 & .70 & .73 \\\text { Sep } & 32.50 & 1.60 & 1.62 & 1.64 & 1.68 \\\text { Jun } & 34.00 & .18 & .19 & 1.73 & 1.77 \\\text { Sep } & 34.00 & .93 & .95 & 2.52 & 2.56\end{array}$

A)$1.64
B)$1.68
C)$1.77
D)$2.52
E)$2.56

Question 36

Which of the following issues exchange-listed option contracts?
I. CBOE
II. SEC
III. OCC
IV. NASDAQ

A)III only
B)IV only
C)I and III only
D)II and IV only
E)I, II, and III only

Question 37

The change in the option symbol quotation system was driven by which of the following?
I. Advances in technology
II. Increase in the number and type of option products
III. Difficulty in applying the old system to NASDAQ stocks
IV. Difficulty in applying the system to complicated option products

A)I, II, III, and IV
B)II, III, and IV
C)I, II, and IV
D)II and III
E)I, II and III

Question 38

Which one of the following options is out of the money?

A)call with a $20 strike and a stock price of $21
B)put with a $35 strike and a stock price of $33
C)call with a $45 strike and stock price of $46
D)put with a $75 strike and a stock price of $70
E)call with a $50 strike and a stock price of $49

Question 39

Laney just purchased 3 call option contracts on Microsoft stock. How many shares of stock can she buy at the strike price based on these contracts?

A)3
B)30
C)300
D)30,000
E)300,000

Question 40

Which one of the following options is in the money?

A)call with a $45 strike and an underlying stock price of $42
B)put with a $35 strike and an underlying stock price of $36
C)call with a $15 strike and an underlying stock price of $15
D)put with a $45 strike and an underlying stock price of $42
E)call with a $30 strike and an underlying stock price of $29

Question 41

Which one of the following is a bull call spread?

A)buying a $30 call and selling a $35 call on the same stock
B)selling a $30 call and buying a $35 call on the same stock
C)buying a $30 call and selling a $25 call on the same stock
D)selling a $30 call and buying a $35 put
E)buying a $30 call and selling a $35 put

Question 42

Which one of the following is a bear call spread?

A)buying a $30 call and selling a $35 call on the same stock
B)selling a $30 call and buying a $30 call on the same stock
C)buying a $30 call and selling a $25 call on the same stock
D)selling a $30 call and buying a $35 put
E)buying a $30 call and selling a $35 put

Question 43

Which one of the following is the lower price bound for the intrinsic value of an American call option on a stock?

A)$0
B)strike price
C)stock price
D)Max(S − K, 0)
E)Max(K − S, 0)

Question 44

You bought a call option with a strike price of $40. What is your total payoff on this option contract if the underlying stock is selling for $42.70 on the option expiration date?

A)$3
B)$70
C)$133
D)$233
E)$270

Question 45

Which one of the following applies to a naked call?

A)unlimited potential profits
B)unlimited potential losses
C)sale of a put on a stock you do not own
D)sale of a call on a stock you currently own
E)purchase of a call on a stock you do not own

Question 46

What is the total amount you will receive if you sell 10 June $27.50 puts on Texas Instruments?
$\text { Iexas Instruments (TXN) }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{llllll}\text { Exp } & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { May } & 25.00 & 6.60 & 6.70 & \text { N/A } & .01 \\\text { Jun } & 25.00 & 6.50 & 6.75 & \text { N/A } & .03 \\\text { Oct } & 25.00 & 6.95 & 7.25 & .39 & .42 \\\text { May } & 27.50 & 4.10 & 4.15 & \text { N/A } & .01\\\text { Jun}&27.50&4.05&4.30&.07&.10\end{array}$

A)unknown
B)$70
C)$100
D)$4,050
E)$4,300

Question 47

Amy bought a $50 May call and a $50 May put on the same underlying stock. This strategy is referred to as which one of the following?

A)bull spread
B)bear spread
C)parity play
D)short straddle
E)long straddle

Question 48

Which one of the following represents an arbitrage opportunity?

A)stock price of $18 and strike price of $20
B)call price of $.40 and put price of $.40
C)PCP-implied put price of $.30 and call price of $.28
D)PCP-implied put price of $.30 and put market price of $.31
E)PCP-implied call price of $.20 and a put market price of $.22

Question 49

You wrote a covered call with a strike price of $35 and an option premium of $1.10. Assume the stock price is $34 a share currently and that it falls to $32 a share and remains at that price until the option expires. As a result, you will:

A)lose an amount equal to the option premium.
B)lose the option premium but get to keep the stock.
C)keep both your stock and the option premium.
D)keep the option premium but lose your shares of stock.
E)lose both your stock and the option premium.

Question 50

A short straddle:

A)involves exercising two or more options simultaneously.
B)is the purchase of both a put and a call on the same underlying asset.
C)obtains its maximum profit when the underlying stock price is equal to the strike price.
D)involves writing a call on shares of stock you currently own.
E)is a highly bullish strategy.

Question 51

How much will it cost to purchase 4 June $27.50 calls on Texas Instruments?
$\text { Iexas Instruments (TXN) }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{llllll}\text { Exp } & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { May } & 25.00 & 6.60 & 6.70 & \text { N/A } & .01 \\\text { Jun } & 25.00 & 6.50 & 6.75 & \text { N/A } & .03 \\\text { Oct } & 25.00 & 6.95 & 7.25 & .39 & .42 \\\text { May } & 27.50 & 4.10 & 4.15 & \text { N/A } & .01\\\text { Jun}&27.50&4.05&4.30&.07&.10\end{array}$

A)$21
B)$1,215
C)$1,245
D)$1,720
E)$2,075

Question 52

You own 200 shares of Allen Bros. stock. Which one of the following would allow you to receive an option premium in exchange for selling your shares in Allen Bros. at the strike price?

A)straddle
B)long spread
C)selling a put
D)buying a call
E)writing a covered call

Question 53

The maximum:

A)profit from buying a put is the stock price.
B)loss from writing a put is the option premium.
C)profit from writing a call is the strike price.
D)loss from buying a call is $0.
E)profit from writing a put is the option premium.

Question 54

Katie purchased 6 call options on Atlas Co. stock with a strike price of $40. On the expiration date, the stock was priced at $38.95 a share. What is the total payoff on the option contracts?

A)−$220.00
B)−$55.00
C)$0
D)$2.20
E)$55.00

Question 55

Which one of the following is the primary purpose of a protective put?

A)profit from an expected future increase in the underlying stock's value
B)guarantee a higher return than is possible from just owning the underlying security
C)offset the risk associated with a decrease in the value of the underlying asset
D)receipt of the option premium
E)increase in potential rate of return due to increase in risk

Question 56

Which one of the following is the lower price bound for the intrinsic value of an American put option on a stock?

A)0
B)strike price
C)stock price
D)Max(S − K, 0)
E)Max(K − S, 0)

Question 57

What is the total option premium you will receive if you sell 4 May $27.50 calls on Texas Instruments?
$\text { Iexas Instruments (TXN) }$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {CALL}$ $\quad$ $\quad$ $\quad$$\text {PUT}$
$\begin{array}{llllll}\text { Exp } & \text { Strike } & \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask }\\\text { May } & 25.00 & 6.60 & 6.70 & \text { N/A } & .01 \\\text { Jun } & 25.00 & 6.50 & 6.75 & \text { N/A } & .03 \\\text { Oct } & 25.00 & 6.95 & 7.25 & .39 & .42 \\\text { May } & 27.50 & 4.10 & 4.15 & \text { N/A } & .01\\\text { Jun}&27.50&4.05&4.30&.07&.10\end{array}$

A)$90
B)$850
C)$1,640
D)$2,170
E)$3,375

Question 58

Which one of the following values is discounted in the put-call parity formula?

A)call price
B)put price
C)stock price
D)strike price
E)option premium

Question 59

Which one of the following correctly defines the range of time values for an American put option?

A)$0 to +$1
B)−$1 to +$1
C)≤ $0
D)≥ $0
E)= $0

Question 60

Josh owns 2 call options on Foster Glass stock. The exercise price is $47.50 and the stock price at expiration is $49.01. What is the total payoff on the option contracts?

A)$0
B)−$3.02
C)$3.02
D)$30.20
E)$302.00

Question 61

You own 2 SPX call options with a strike of 1930. What is the payoff at maturity for this option contract if the S&P 500 index is 1980?

A)$0
B)$100
C)$2,000
D)$10,000
E)$15,000

Question 62

Rosalita purchased a put option with a strike price of $47. She paid a total of $150 for the contract. What is the break-even stock price?

A)$31.40
B)$33.60
C)$36.40
D)$45.50
E)$48.50

Question 63

You purchased 7 put option contracts on Alto Industries. The strike price was $42.50 and the option premium was $1.30. On the expiration date, the stock was valued at $41.40 a share. What is the payoff on the option contracts?

A)−$140
B)$0
C)$110
D)$360
E)$770

Question 64

You purchased 1 SPX call option with a strike of 1500. You wrote one SPX call option with the same maturity date and a strike of 1450. At maturity, what is your payoff if the S&P 500 is at 1475?

A)−$2,500
B)−$250
C)$25
D)$250
E)$2,500

Question 65

Jeff paid a call premium of $.60 when he purchased his call option with a strike price of $22. What is the break-even stock price?

A)$0
B)$.25
C)$22.25
D)$22.60
E)$22.75

Question 66

Kim Lee purchased 6 put option contracts on Eastern Imports stock at a strike price of $47.50. The option premium was $.65. At expiration, the stock was valued at $44.90 a share. What is her percentage return?

A)−100.00%
B)0%
C)5.47%
D)32.82%
E)300.00%

Question 67

You purchased a call option with a $17.35 strike price and a call premium of $.30. On the expiration date, the underlying stock was priced at $18.55 per share. What is the percentage return on your investment?

A)−100%
B)0%
C)125%
D)200%
E)300%

Question 68

Jasmine purchased one call option with a strike price of $35 when the call premium was $1.10. What is the break-even stock price?

A)$0
B)$33.90
C)$34.45
D)$35.00
E)$36.10

Question 69

You purchased 1 SPX put option with a strike of 1400. You wrote one SPX put option with the same maturity date and a strike of 1300. At maturity, what is your total payoff if the S&P 500 index is 1320?

A)−$8,000
B)−$2,000
C)$2,000
D)$4,000
E)$8,000

Question 70

Callie purchased 3 call options with a $37.50 strike price and a call premium of $.90. On the expiration date, the underlying stock was priced at $40.20 per share. What is her percentage return on this investment?

A)−100.00%
B)70.45%
C)181.82%
D)200%
E)909.10%

Question 71

You own 10 put option contracts on JL Industrial stock. You paid an option premium of $.75 for a strike price of $26.25. On the option expiration date, the stock was selling for $25.15 a share. What is your percentage return?

A)−100.00%
B)−18.75%
C)46.67%
D)194.00%
E)149.75%

Question 72

You purchased 5 put option contracts on Mountain Builders stock at an option premium of $.70. The strike price is $30. What is your break-even stock price?

A)$19.90
B)$24.35
C)$25.00
D)$29.30
E)$30.70

Question 73

You purchased 6 call options with a $40 strike price at a total cost of $150. On the expiration date, the underlying stock was priced at $39.20. What is the percentage return on your investment?

A)−420.00%
B)−100.00%
C)68.75%
D)2.02%
E)220.00%

Question 74

You own 200 shares of Delta stock, which is currently worth $33 a share. You just paid an option premium of $.55 to buy two put contracts on this stock with a strike price of $30. What is the maximum loss per share you are avoiding by purchasing the option contract?

A)$30.00
B)$30.85
C)$32.15
D)$33.00
E)$33.85

Question 75

Tim purchased 5 put option contracts on Western Fields stock. The strike price was $35 and the option premium was $.55. At expiration, the stock was selling for $35.75. What is the payoff on the option contracts?

A)−$60
B)−$30
C)$0
D)$30
E)$60

Question 76

Gerold purchased 3 put option contracts at an option premium of $.95 and a strike price of $40. At expiration, the stock price was $42.25 per share. What is his percentage return?

A)−100.00%
B)0%
C)15.79%
D)21.62%
E)31.58%

Question 77

Jennifer purchased 3 put option contracts on Winslow Mfg. stock. The option premium was $.75 and the strike price was $27.50. On the expiration date, the stock was selling for $27.75 a share. What is the total payoff on the option contracts?

A)−$100
B)−$50
C)$0
D)$50
E)$150

Question 78

You own 2 SPX put options with a strike of 1600. What is the payoff at maturity for this option contract if the S&P 500 index is 1622?

A)−$4,400
B)−$44
C)$0
D)$44
E)$4,400

Question 79

Russ paid a total of $125 to purchase 10 call options with a strike price of $23.50. What is the break-even stock price?

A)$12.50
B)$17.65
C)$23.63
D)$25.00
E)$236.30

Question 80

You own 4 put option contracts on ALZ stock. The contracts have a $17.50 strike price and you paid an option premium of $.40. What is the break-even stock price?

A)$17.10
B)$17.30
C)$17.50
D)$17.70
E)$17.90