Question 1

Which of the following is constant throughout the life of a standardized option contract?

Accepted Answer

All of the options mentioned in the question are constant throughout the life of a standardized option contract. Option exercise style, exercise price, contract size, and maturity date are all predetermined and specified in the option contract at the time of issuance.

Question 2

The Canadian Derivatives Clearing Corporation (CDCC) has created the _________ system to ensure the integrity of all option trading.

Accepted Answer

The Canadian Derivatives Clearing Corporation (CDCC) has created the Intermediary system to ensure the integrity of all option trading by acting as a central counterparty to all trades, thereby reducing counterparty risk.

Question 3

When you write a covered call, you:

Accepted Answer

When you write a covered call, you are selling someone the option to purchase shares of the underlying security from you at a predetermined price (strike price) within a specific period of time in exchange for receiving the option premium. By doing this, you forfeit some of the potential gains that you could make if the stock price were to rise above the strike price. However, you do receive a current income from selling the call option.

Question 4

Index options are settled:

Accepted Answer

Index options are settled in cash, meaning that the amount of the payoff is simply transferred from the option seller to the option buyer. This is the most efficient and practical settlement method for index options.

Question 5

An example of a straddle is:

Accepted Answer

A straddle involves buying or selling both a call and a put option with the same strike price and expiration date. Option E describes selling both a Jan 30 put and a Jan 30 call, which is a short straddle.

Question 6

Employee stock options

Accepted Answer

Employee stock options help align manager's interests with those of the shareholders by giving them the opportunity to financially benefit from the company's performance.

Question 7

Which one of the following represents an arbitrage opportunity?

Accepted Answer

The answer of Which one of the following represents an...

Question 8

Which of the following position will involve the investor with unlimited risk exposure?

Accepted Answer

Selling a naked call involves unlimited risk because if the market price of the underlying asset rises significantly, the seller has to provide the asset at the strike price, potentially incurring a huge loss with no upper limit.

Question 9

You bought both a call and a put contract on ABC stock with a strike price of $30. Both expire on the same day. If the stock price at expiration is $32, you will _________ the call and _________ the put.

Accepted Answer

You will exercise the call option to buy the stock at $30 because the market price is $32, making a profit on the difference. You will not exercise the put option because the market price is above the strike price, making it unfavorable to sell the stock at $30.

Question 10

You find a call and a put with the same strike price and exercise date. The price of the put is greater than the price of the call. You know that:

Accepted Answer

If the price of the put is greater than the price of the call with the same strike price and exercise date, then the put is in-the-money while the call is out-of-the-money. Therefore, the stock price must be below the strike price, making the put option valuable while the call option is worthless.

Question 11

If the stock price is greater than the strike price, a call immediately exercised is said to be:

Accepted Answer

If the stock price is greater than the strike price, a call option is in-the-money, meaning it has intrinsic value and can be exercised for a profit.

Question 12

Suppose there is a call option on a stock with one month to expiration. The intrinsic value of the call must be _________ than the actual value of the call.

Accepted Answer

The intrinsic value of a call option is the difference between the stock price and the strike price. Therefore, it cannot be greater than the actual value of the call option, which includes time value and other factors. It can be equal to the actual value in some cases, but it cannot be greater. This is true regardless of whether the stock pays a dividend or not.

Question 13

Employee stock options

Accepted Answer

Employee stock options usually have a vesting period, which means employees have to wait a certain amount of time before they can exercise their options and buy company stock at the strike price. This is to incentivize employees to stay with the company for a longer period of time.

Answer: D
 Employee stock options are no longer re-priced, which means that if the value of the company's stock decreases, the strike price for the option does not decrease accordingly. This can lead to situations where employees are left with overpriced options that may never be exercised.

Question 14

A short straddle

Accepted Answer

A short straddle involves selling both a call option and a put option with the same strike price and expiration date. If the stock price remains constant, the options will expire worthless, allowing the investor to keep the premiums collected from selling the options. Therefore, a short straddle allows you to profit if a stock price remains constant.

Question 15

You believe that an important court decision regarding a company is about to be announced. You are unsure of the exact decision, but you feel the stock price will increase dramatically if the decision is in favor of the company or decline dramatically if the decision does not favor the company. The option strategy you should undertake is a:

Accepted Answer

A straddle involves buying a call and put option on the same stock with the same strike price and expiration date. This strategy is used when an investor expects a stock to move significantly but is unsure of the direction. Since the scenario describes a situation where the stock price could move dramatically in either direction based on a court decision, a straddle is the appropriate strategy to potentially profit from large price movements regardless of the direction.

Question 16

Which of the following is an income producing strategy?

Accepted Answer

Covered calls involve owning a stock and selling call options on that stock, generating income from the premiums received. The other options listed may involve options trading, but they do not necessarily generate income. Some options strategies, such as buying naked calls or puts, may even involve paying premiums rather than receiving them.

Question 17

To keep the value of the "under-water" employee stock options afloat, company may

Accepted Answer

Lowering the exercise price of the employee stock options will make them more attractive and valuable to employees, and may entice them to stay with the company. This can also help to mitigate the "under-water" situation where the stock price has fallen below the exercise price of the options. However, it is important to note that this strategy may dilute the value of existing shareholders' equity.

Question 18

Which of the following is false regarding employee stock options?

Accepted Answer

Employee stock options usually have a vesting period before they can be exercised by the employee. This period can range from a few months to several years.

Question 19

The shares of Inco are currently trading at $45 a share. You are thinking about buying put options on Inco expiring in two months with an exercise price of $50. Which of the following is the most likely price for these puts in the market?

Accepted Answer

Since the stock price is currently below the exercise price of the put options, the options are likely to have value. The closer the exercise price is to the current stock price, the more expensive the options will be. Additionally, the shorter the time to expiration, the cheaper the options will be. Based on these factors, option C at $7 is the most likely price for the put options.

Question 20

The price of a stock is $35 per share and the corresponding November put with an exercise price of $40 is trading at $3. The intrinsic value of the option is

Accepted Answer

The intrinsic value of a put option is calculated as the exercise price minus the stock price, provided this difference is positive. Here, it's $40 - $35 = $5. If the difference is negative, the intrinsic value is considered zero, not negative.

Quiz 14: Options

Which of the following is constant throughout the life of a standardized option contract?

The Canadian Derivatives Clearing Corporation (CDCC) has created the _________ system to ensure the integrity of all option trading.

When you write a covered call, you:

Index options are settled:

An example of a straddle is:

Employee stock options

Which one of the following represents an arbitrage opportunity?

Which of the following position will involve the investor with unlimited risk exposure?

You bought both a call and a put contract on ABC stock with a strike price of $30. Both expire on the same day. If the stock price at expiration is $32, you will _ the call and _ the put.

You find a call and a put with the same strike price and exercise date. The price of the put is greater than the price of the call. You know that:

If the stock price is greater than the strike price, a call immediately exercised is said to be:

Suppose there is a call option on a stock with one month to expiration. The intrinsic value of the call must be _________ than the actual value of the call.

Employee stock options

A short straddle

Which of the following is an income producing strategy?

To keep the value of the "under-water" employee stock options afloat, company may

Which of the following is false regarding employee stock options?

The shares of Inco are currently trading at $45 a share. You are thinking about buying put options on Inco expiring in two months with an exercise price of $50. Which of the following is the most likely price for these puts in the market?

The price of a stock is $35 per share and the corresponding November put with an exercise price of $40 is trading at $3. The intrinsic value of the option is