Deck 20: Options Markets: Introduction

Question 1

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

A)strike price.
B)exercise price.
C)execution price.
D)strike price or execution price.
E)strike price or exercise price.

Answer 1

E
Explanation: The price that the buyer of a call option pays for the underlying asset if she executes her option is strike price or exercise price.

Question 2

An American call option allows the buyer to

A)sell the underlying asset at the exercise price on or before the expiration date.
B)buy the underlying asset at the exercise price on or before the expiration date.
C)sell the option in the open market prior to expiration.
D)sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.
E)buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

Answer 2

E
Explanation: An American call option may be exercised (allowing the holder to buy the underlying asset) on or before expiration; the option contract also may be sold prior to expiration.

Question 3

A European put option can be exercised

A)any time in the future.
B)only on the expiration date.
C)if the price of the underlying asset declines below the exercise price.
D)immediately after dividends are paid.

Answer 3

B
Explanation: European options can be exercised at expiration only.

Question 4

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

A)strike price.
B)exercise price.
C)execution price.
D)strike price or execution price.
E)strike price or exercise price.

Question 5

A European put option allows the holder to

A)buy the underlying asset at the striking price on or before the expiration date.
B)sell the underlying asset at the striking price on or before the expiration date.
C)potentially benefit from a stock price increase.
D)sell the underlying asset at the striking price on the expiration date.
E)potentially benefit from a stock price increase and sell the underlying asset at the striking price on the expiration date.

Question 6

All else equal, call option values are higher

A)in the month of May.
B)for low dividend payout policies.
C)for high dividend payout policies.
D)in the month of May and for low dividend payout policies.
E)in the month of May and for high dividend payout policies.

Question 7

The price that the writer of a call option receives to sell the option is called the

A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.

Question 8

A European call option allows the buyer to

A)sell the underlying asset at the exercise price on the expiration date.
B)buy the underlying asset at the exercise price on or before the expiration date.
C)sell the option in the open market prior to expiration.
D)buy the underlying asset at the exercise price on the expiration date.
E)sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

Question 9

To adjust for stock splits

A)the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.
B)the exercise price of the option is increased by the factor of the split and the number of options held is reduced by that factor.
C)the exercise price of the option is reduced by the factor of the split and the number of options held is reduced by that factor.
D)the exercise price of the option is increased by the factor of the split and the number of options held is increased by that factor.

Question 10

The current market price of a share of AT&T stock is $50.If a call option on this stock has a strike price of $45, the call

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the market price of AT&T stock is $40.
D)is out of the money and sells for a higher price than if the market price of AT&T stock is $40.
E)is in the money and sells for a higher price than if the market price of AT&T stock is $40.

Question 11

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

A)strike price.
B)exercise price.
C)execution price.
D)strike price or exercise price.
E)None of the options

Question 12

All else equal, call option values are lower

A)in the month of May.
B)for low dividend payout policies.
C)for high dividend payout policies.
D)in the month of May and for low dividend payout policies.
E)in the month of May and for high dividend payout policies.

Question 13

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

A)strike price.
B)exercise price.
C)execution price.
D)strike price or exercise price.
E)strike price or execution price.

Question 14

The price that the buyer of a put option pays to acquire the option is called the

A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.

Question 15

An American put option allows the holder to

A)buy the underlying asset at the striking price on or before the expiration date.
B)sell the underlying asset at the striking price on or before the expiration date.
C)potentially benefit from a stock price increase.
D)sell the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.
E)buy the underlying asset at the striking price on or before the expiration date and potentially benefit from a stock price increase.

Question 16

The price that the writer of a put option receives to sell the option is called the

A)premium.
B)exercise price.
C)execution price.
D)acquisition price.
E)strike price.

Question 17

An American put option can be exercised

A)any time on or before the expiration date.
B)only on the expiration date.
C)any time in the indefinite future.
D)only after dividends are paid.
E)None of the options

Question 18

A European call option can be exercised

A)any time in the future.
B)only on the expiration date.
C)if the price of the underlying asset declines below the exercise price.
D)immediately after dividends are paid.

Question 19

The price that the buyer of a call option pays to acquire the option is called the

A)strike price.
B)exercise price.
C)execution price.
D)acquisition price.
E)premium.

Question 20

An American call option can be exercised

A)any time on or before the expiration date.
B)only on the expiration date.
C)any time in the indefinite future.
D)only after dividends are paid.
E)None of the options

Question 21

A put option on a stock is said to be in the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.

Question 22

The current market price of a share of CSCO stock is $22.If a call option on this stock has a strike price of $20, the call

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the market price of CSCO stock is $21.
D)is out of the money and sells for a higher price than if the market price of CSCO stock is $21.
E)is in the money and sells for a higher price than if the market price of CSCO stock is $21.

Question 23

The current market price of a share of MOT stock is $24.If a call option on this stock has a strike price of $24, the call

A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options

Question 24

A call option on a stock is said to be at the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.

Question 25

The current market price of a share of IBM stock is $195.If a call option on this stock has a strike price of $195, the call

A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options

Question 26

A call option on a stock is said to be in the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.

Question 27

The current market price of a share of a stock is $20.If a put option on this stock has a strike price of $18, the put

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the strike price of the put option was $23.
D)is out of the money and sells for a higher price than if the strike price of the put option was $23.
E)is in the money and sells for a higher price than if the strike price of the put option was $23.

Question 28

The current market price of a share of CSCO stock is $22.If a put option on this stock has a strike price of $20, the put

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the strike price of the put option was $25.
D)is out of the money and sells for a higher price than if the strike price of the put option was $25.
E)is in the money and sells for a higher price than if the strike price of the put option was $25.

Question 29

The current market price of a share of a stock is $80.If a put option on this stock has a strike price of $75, the put

A)is in the money.
B)is out of the money.
C)sells for a lower price than if the market price of the stock is $75.
D)is in the money and sells for a lower price than if the market price of the stock is $75.
E)is out of the money and sells for a lower price than if the market price of the stock is $75.

Question 30

The current market price of a share of AT&T stock is $50.If a put option on this stock has a strike price of $45, the put

A)is out of the money.
B)is in the money.
C)sells for a lower price than if the market price of AT&T stock is $40.
D)is out of the money and sells for a lower price than if the market price of AT&T stock is $40.
E)is in the money and sells for a lower price than if the market price of AT&T stock is $40.

Question 31

The current market price of a share of Boeing stock is $75.If a call option on this stock has a strike price of $70, the call

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the market price of Boeing stock is $70.
D)is out of the money and sells for a higher price than if the market price of Boeing stock is $70.
E)is in the money and sells for a higher price than if the market price of Boeing stock is $70.

Question 32

The current market price of a share of MOT stock is $15.If a put option on this stock has a strike price of $20, the put

A)is out of the money.
B)is in the money.
C)can be exercised profitably.
D)is out of the money and can be exercised profitably.
E)is in the money and can be exercised profitably.

Question 33

The current market price of a share of JNJ stock is $60.If a put option on this stock has a strike price of $55, the put

A)is in the money.
B)is out of the money.
C)sells for a lower price than if the market price of JNJ stock is $50.
D)is in the money and sells for a lower price than if the market price of JNJ stock is $50.
E)is out of the money and sells for a lower price than if the market price of JNJ stock is $50.

Question 34

The current market price of a share of CAT stock is $76.If a call option on this stock has a strike price of $76, the call

A)is out of the money.
B)is in the money.
C)is at the money.
D)None of the options

Question 35

A put option on a stock is said to be out of the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.

Question 36

A call option on a stock is said to be out of the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.

Question 37

A put option on a stock is said to be at the money if

A)the exercise price is higher than the stock price.
B)the exercise price is less than the stock price.
C)the exercise price is equal to the stock price.
D)the price of the put is higher than the price of the call.
E)the price of the call is higher than the price of the put.

Question 38

The current market price of a share of TSCO stock is $75.If a put option on this stock has a strike price of $79, the put

A)is out of the money.
B)is in the money.
C)can be exercised profitably.
D)is out of the money and can be exercised profitably.
E)is in the money and can be exercised profitably.

Question 39

The current market price of a share of Disney stock is $60.If a call option on this stock has a strike price of $65, the call

A)is out of the money.
B)is in the money.
C)can be exercised profitably.
D)is out of the money and can be exercised profitably.
E)is in the money and can be exercised profitably.

Question 40

The current market price of a share of Boeing stock is $75.If a put option on this stock has a strike price of $70, the put

A)is out of the money.
B)is in the money.
C)sells for a higher price than if the market price of Boeing stock is $70.
D)is out of the money and sells for a higher price than if the market price of Boeing stock is $70.
E)is in the money and sells for a higher price than if the market price of Boeing stock is $70.

Question 41

A covered call position is

A)the simultaneous purchase of the call and the underlying asset.
B)the purchase of a share of stock with a simultaneous sale of a put on that stock.
C)the short sale of a share of stock with a simultaneous sale of a call on that stock.
D)the purchase of a share of stock with a simultaneous sale of a call on that stock.
E)the simultaneous purchase of a call and sale of a put on the same stock.

Question 42

The maximum loss a buyer of a stock call option can suffer is equal to

A)the striking price minus the stock price.
B)the stock price minus the value of the call.
C)the call premium.
D)the stock price.
E)None of the options

Question 43

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will ________.

A)increase; increase
B)decrease; increase
C)increase; decrease
D)decrease; decrease
E)Cannot tell without further information

Question 44

According to the put-call parity theorem, the value of a European put option on a nondividend paying stock is equal to

A)the call value plus the present value of the exercise price plus the stock price.
B)the call value plus the present value of the exercise price minus the stock price.
C)the present value of the stock price minus the exercise price minus the call price.
D)the present value of the stock price plus the exercise price minus the call price.
E)None of the options

Question 45

The potential loss for a writer of a naked call option on a stock is

A)limited.
B)unlimited.
C)larger the lower the stock price.
D)equal to the call premium.
E)None of the options

Question 46

You purchase one JNJ 75 call option for a premium of $3.Ignoring transaction costs, the break-even price of the position is

A)$75.
B)$72.
C)$3.
D)$78.

Question 47

You write one AT&T February 50 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position

A)$50
B)$55
C)$45
D)$40

Question 48

The current market price of a share of Disney stock is $60.If a put option on this stock has a strike price of $65, the put

A)is out of the money.
B)is in the money.
C)can be exercised profitably.
D)is out of the money and can be exercised profitably.
E)is in the money and can be exercised profitably.

Question 49

Binary options

A)are based on two possible outcomes-yes or no.
B)may make a payoff of a fixed amount if a specified event happens.
C)may make a payoff of a fixed amount if a specified event does not happen.
D)may make a payoff of a fixed amount if a specified event happens and are based on two possible outcomes-yes or no.
E)All of the options

Question 50

Barrier options have payoffs that

A)have payoffs that only depend on the minimum price of the underlying asset during the life of the option.
B)depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.
C)are known in advance.
D)have payoffs that only depend on the maximum price of the underlying asset during the life of the option.

Question 51

You purchase one IBM 200 call option for a premium of $6.Ignoring transaction costs, the break-even price of the position is

A)$194.
B)$228.
C)$206.
D)$211.

Question 52

The current market price of a share of CAT stock is $76.If a put option on this stock has a strike price of $80, the put

A)is out of the money.
B)is in the money.
C)can be exercised profitably.
D)is out of the money and can be exercised profitably.
E)is in the money and can be exercised profitably.

Question 53

Call options on IBM listed stock options are

A)issued by IBM Corporation.
B)created by investors.
C)traded on various exchanges.
D)issued by IBM Corporation and traded on various exchanges.
E)created by investors and traded on various exchanges.

Question 54

Currency-translated options have

A)only asset prices denoted in a foreign currency.
B)only exercise prices denoted in a foreign currency.
C)payoffs that only depend on the maximum price of the underlying asset during the life of the option.
D)either asset or exercise prices denoted in a foreign currency.

Question 55

Lookback options have payoffs that

A)depend in part on the minimum or maximum price of the underlying asset during the life of the option.
B)only depend on the minimum price of the underlying asset during the life of the option.
C)only depend on the maximum price of the underlying asset during the life of the option.
D)are known in advance.

Question 56

You write one JNJ February 70 put for a premium of $5.Ignoring transactions costs, what is the break-even price of this position

A)$65
B)$75
C)$5
D)$70

Question 57

The Option Clearing Corporation is owned by

A)the Federal Reserve System.
B)the exchanges on which stock options are traded.
C)the major U.S.banks.
D)the Federal Deposit Insurance Corporation.

Question 58

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits.

A)are; are not
B)are; are
C)are not; are
D)are not; are not
E)are always; are sometimes

Question 59

The maximum loss a buyer of a stock put option can suffer is equal to

A)the striking price minus the stock price.
B)the stock price minus the value of the call.
C)the put premium.
D)the stock price.
E)None of the options

Question 60

The lower bound on the market price of a convertible bond is

A)its straight bond value.
B)its crooked bond value.
C)its conversion value.
D)its straight bond value and its conversion value.
E)None of the options

Question 61

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is

A)$200.
B)$300.
C)zero.
D)$500.

Question 62

Before expiration, the time value of a call option is equal to

A)zero.
B)the actual call price minus the intrinsic value of the call.
C)the intrinsic value of the call.
D)the actual call price plus the intrinsic value of the call.

Question 63

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. If, at expiration, the price of a share of WFM stock is $103, your profit would be

A)$500.
B)$300.
C)zero.
D)$200.

Question 64

A protective put strategy is

A)a long put plus a long position in the underlying asset.
B)a long put plus a long call on the same underlying asset.
C)a long call plus a short put on the same underlying asset.
D)a long put plus a short call on the same underlying asset.
E)None of the options

Question 65

You purchased one AT&T March 50 put and sold one AT&T April 50 put.Your strategy is known as

A)a vertical spread.
B)a straddle.
C)a time spread.
D)a collar.

Question 66

The value of a stock put option is positively related to the following factors except

A)the time to expiration.
B)the striking price.
C)the stock price.
D)All of the options
E)None of the options

Question 67

Suppose the price of a share of IBM stock is $200.An April call option on IBM stock has a premium of $5 and an exercise price of $200.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

A)increases to $204.
B)decreases to $190.
C)increases to $206.
D)decreases to $196.
E)None of the options

Question 68

You purchase one June 70 put contract for a put premium of $4.What is the maximum profit that you could gain from this strategy

A)$7,000
B)$400
C)$7,400
D)$6,600
E)None of the options

Question 69

The following price quotations on WFM were taken from the Wall Street Journal. The premium on one WFM February 90 call contract is

A)$4.1250.
B)$418.00.
C)$412.50.
D)$158.00.

Question 70

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even

A)$101
B)$102
C)$103
D)$104
E)None of the options

Question 71

The following price quotations on WFM were taken from the Wall Street Journal. The premium on one WFM February 85 call contract is

A)$8.875.
B)$887.50.
C)$412.50.
D)$158.00.

Question 72

You purchase one IBM March 200 put contract for a put premium of $6.What is the maximum profit that you could gain from this strategy

A)$20,000
B)$20,600
C)$19,400
D)$19,000

Question 73

All of the following factors affect the price of a stock option except

A)the risk-free rate.
B)the riskiness of the stock.
C)the time to expiration.
D)the expected rate of return on the stock.
E)None of the options

Question 74

Which of the following factors affect the price of a stock option

A)The risk-free rate
B)The riskiness of the stock
C)The time to expiration
D)The expected rate of return on the stock
E)The risk-free rate, riskiness of the stock, and time to expiration

Question 75

The following price quotations were taken from the Wall Street Journal. The premium on one February 90 call contract is

A)$3.1250.
B)$318.00.
C)$312.50.
D)$58.00.

Question 76

Suppose the price of a share of Google stock is $500.An April call option on Google stock has a premium of $5 and an exercise price of $500.Ignoring commissions, the holder of the call option will earn a profit if the price of the share

A)increases to $504.
B)decreases to $490.
C)increases to $506.
D)decreases to $496.
E)None of the options

Question 77

You purchase one September 50 put contract for a put premium of $2.What is the maximum profit that you could gain from this strategy

A)$4,800
B)$200
C)$5,000
D)$5,200
E)None of the options

Question 78

The value of a stock put option is positively related to

A)the time to expiration.
B)the striking price.
C)the stock price.
D)All of the options
E)the time to expiration and the striking price.

Question 79

You purchased one AT&T March 50 call and sold one AT&T March 55 call.Your strategy is known as

A)a long straddle.
B)a horizontal spread.
C)a money spread.
D)a short straddle.
E)None of the options

Question 80

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum potential profit of your strategy is ________ if both options are exercised.

A)$600
B)$500
C)$200
D)$300
E)$100