Deck 14: Options

Question 1

The party who is obligated to buy stock when the option is exercised is called the __________.

A) call owner
B) call writer
C) buyer
D) put writer
E) put owner

Answer 1

D

Question 2

Which of the following is NOT one of the terms which must be stipulated in an options contract?

A) The option contract size.
B) The option exercise style.
C) The delivery or settlement procedure.
D) The symbol of the underlying stock.
E) All of the above

Answer 2

D

Question 3

A _________ is the party who has the obligation, not the right, to sell stock if the option is exercised.

A) call owner
B) call writer
C) Buyer
D) put writer
E) put owner

Answer 3

B

Question 4

If a call option holder elects to buy the underlying stock for the previously specified price they are said to "________" the option.

A) strike
B) put
C) call
D) exercise
E) cover

Question 5

A credit default swap acts like _______ for fixed-income assets.

A) derivatives
B) put options
C) speculative hedges
D) call options
E) futures

Question 6

A listing of the available option contracts and their prices for a particular security arranged by strike price and maturity date is called a(n) _________ chain.

A) premium
B) strike
C) value
D) exercise
E) Intrinsic

Question 7

A security whose value is based on the value of another security is called a _________ security.

A) Primary
B) Secondary
C) Derivative
D) Real
E) cross-match

Question 8

By convention, standardized stock options expire on the

A) first day of the expiry month
B) last day of the expiry month
C) 28^th day of the expiry month
D) Saturday following the third Friday of the expiry month
E) Friday after the first Monday of the month

Question 9

A(n) _________ option gives the owner the right, but not the obligation, to sell an asset within the option period.

A) Call
B) Put
C) American
D) European
E) index

Question 10

Buying a put on a stock that you already own is called a _________. The purpose is to protect the stock from a decline in value.

A) covered put
B) protective put
C) spread
D) straddle
E) Strap

Question 11

A(n) _________ option gives the owner the right, but not the obligation, to sell an asset within the option period.

A) call
B) put
C) American
D) European
E) index

Question 12

An option contract that can only be exercised on the expiration date is a(n) ________ option.

A) call
B) put
C) American
D) European
E) index

Question 13

Selling an option is called

A) option initiation
B) exercising
C) writing a straddle
D) option writing
E) option spotting

Question 14

A call option gives its owner the _________ an asset at the price within the option period.

A) right, but not the obligation, to buy
B) right, but not the obligation, to sell
C) right to borrow
D) obligation to buy
E) obligation to sell

Question 15

The price at which an option will be exercised is called the:

A) premium.
B) option chain.
C) call date.
D) strike price.
E) writing date.

Question 16

An option that would provide its owner a profit if exercised immediately is called a(n) ____________ option.

A) in-the-money
B) out-of-the-money
C) at-the-money
D) cleared
E) straddle

Question 17

A put option gives its owner the _________ an asset at the price within the option period.

A) right, but not the obligation, to buy
B) right, but not the obligation, to sell
C) right to borrow
D) obligation to buy
E) obligation to sell

Question 18

An option that would not yield a profit if exercised now is called a(n) _________ option.

A) initiator
B) cash-settled
C) out-of-the-money
D) cash-free
E) activator

Question 19

_________ is the initial price that the option buyer must pay to the option seller to acquire the contract.

A) Option adjusted spread
B) Net asset value
C) Market value added
D) Option premium
E) Competitive bid

Question 20

If you can exercise an option anytime prior to and including the expiration date, the option is a(n) _________ option.

A) Call
B) Put
C) American
D) European
E) Index

Question 21

Put-call parity is the relationship between the _________ of a call and a put for a European style option with identical exercise date and strike price.

A) market price
B) intrinsic value
C) break-even price
D) premium value
E) expiration value

Question 22

The agency responsible for guaranteeing performance on options is the ___________.

A) Canadian Derivatives Clearing Corporation (CDCC)
B) Canadian Payments Association (CPA)
C) Canadian Deposit Insurance Corporation (CDIC)
D) Investment Funds Institute of Canada (IFIC)
E) Montreal Exchange (ME)

Question 23

The maximum

A) Profit from writing a put is the option premium
B) Loss from buying a call is zero
C) Profit from writing a call is the exercise price
D) Loss from writing a put is the option premium
E) Profit from buying a put is the stock price

Question 24

Which of the following options exchanges does the Options Clearing Corporation act as the clearing agency for?

A) Canadian Derivatives Clearing Corporation
B) Chicago Board Options Exchange
C) New York Options Exchange
D) Boston Options Exchange
E) Montreal Exchange

Question 25

The exercise price of a _________ is the price at which the holder can purchase common shares of an issuing company.

A) put option
B) call option
C) warrant
D) convertible security
E) straddle

Question 26

Which of the following is included in an option contract?

A) The delivery or settlement procedure.
B) The exercise price.
C) Whether the exercise is American or European.
D) The option contract size.
E) All of the above.

Question 27

Which of the following is the main reason for the Options Clearing Corporation to change the system of options symbols?

A) Investors were having trouble understanding the former 20-letter system.
B) Options exchanges had to use special symbols for NASDAQ listed stocks.
C) Different stocks had the same options ticker symbol.
D) Letter combinations did not differentiate between a put and a call.
E) All possible symbol combinations had been taken making it impossible for new options to be traded

Question 28

You owned an option that expires on February 21. You exercised the option on February 3. The option must have been a(n):

A) call option.
B) put option.
C) European option.
D) American option.
E) Insufficient information.

Question 29

Which of the following are not traded in Canada?

A) Bond options
B) Equity options
C) Foreign currency options
D) All of the above
E) None of the above

Question 30

Buying a put and a call at the same exercise price on the same underlying stock is a _______.

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

Question 31

Selling a call on a share of stock you already own is a _________.

A) covered call
B) protective call
C) spread
D) straddle
E) strap

Question 32

The intrinsic value of an option is the payoff that the option holder will receive if the:

A) option is not exercised
B) market price exceeds the exercise price
C) stock remains at its current price
D) stock price equals the strike price
E) strike price exceeds the market price

Question 33

A standard option contract on stock has a contract size of _________ share(s).

A) 1
B) 10
C) 100
D) 1,000
E) 10,000

Question 34

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) Bank of Canada Federal Reserve
C) Montreal Options Exchange
D) Options Clearing Corporation
E) ICE Derivatives Exchange

Question 35

An investor owns 10,000 shares of stock and is concerned about a potential price decline. Which of the following strategies would provide the best protection for the investor?

A) Write 100 call options.
B) Buy 100 call options.
C) Write 100 put options.
D) Buy 100 put options.
E) None of the above.

Question 36

The former system of options ticker symbols used _________ letters while the new system uses _________.

A) 5; 4
B) 4; 5
C) 20; 5
D) 5; 20
E) 20; 4

Question 37

Options granted to workers allowing them to purchase shares of the company's stock at a specified price are called a(n):

A) leveraged buyout.
B) employee put.
C) employee stock option.
D) worker's compensation.
E) restruck option.

Question 38

A _______ option writing implies that the option writer does not have a position in the underlying asset and is only selling the option.

A) long
B) short
C) naked
D) written
E) basic

Question 39

A(n) __________ opportunity is a trade where the investor has zero net investment, has no possibility of loss and the potential possibility of a gain.

A) spread
B) straddle
C) arbitrage
D) call parity
E) put parity

Question 40

An option on the S&P Canada 60 would be considered a(n) _________ option.

A) call
B) put
C) American
D) equity
E) stock index

Question 41

The price of a stock is $40. There are both call and put options on this stock. Both options have an exercise price of $40 and expire in two months. The market return is 10% and the risk-free rate is 4%. Given this, you know the

A) Call option must be worthless
B) Put option must be worthless
C) Call option price is greater than the put option price
D) Put option price is greater than the call option price
E) Both (A) and (B)

Question 42

Suppose you feel a certain stock will appreciate in value. Which of the following option strategies will create a profit for you?
I) Buy a call.
II) Buy a put.
III) Sell a call.
IV) Sell a put.

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

Question 43

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 44

Ignoring the premium, the maximum loss from writing a call option is:

A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Question 45

You have written a put option on ABC stock. The exercise price is $30 and the current stock price is $31.The option payoff wills _________ if the stock price increases by $1 and the payoff will _________ if the stock price decreases by $1.

A) Increase; decrease
B) Decrease; increase
C) Remain the same; increase
D) Remain the same; decrease
E) Remain the same; remain the same

Question 46

The maximum loss from buying a call option is:

A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Question 47

Which one of the following stock options is in-the-money?

A) Call with a $35 exercise price and a stock price of $33
B) Put with a $40 exercise price and a stock price of $41
C) Call with a $25 exercise price and a stock price of $25
D) Put with a $30 exercise price and a stock price $29
E) Call with a $20 exercise price and a stock price of $18

Question 48

The lower price for a call option on a stock is the _________ and the lower price limit for a put option on the same stock is the _________

A) Stock price; stock price.
B) Stock price; put intrinsic value.
C) Call intrinsic value; stock price.
D) Call intrinsic value; put exercise price.
E) Call intrinsic value; put intrinsic value.

Question 49

Ignoring the premium, the maximum loss from writing a put option is:

A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Question 50

Suppose you feel a certain stock will decline in value. Which of the following option strategies will create a profit for you?
I) Buy a call.
II) Buy a put.
III) Sell a call.
IV) Sell a put.

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

Question 51

A stock is currently selling for $65. There exists both a call option and a put option with a strike price of $65 and the same expiration date. Which of the following is true?

A) The call price is always greater than the put price.
B) The put price is always greater than the call price.
C) The call and the put will have the same price.
D) The call price will be greater than the put price only if the stock pays a dividend.
E) None of the above.

Question 52

The maximum price for a put option is:

A) the stock price.
B) the strike price.
C) the intrinsic value.
D) the stock price minus the strike price.
E) There is no upper limit for a put price.

Question 53

The maximum price for a call option is:

A) the stock price.
B) the strike price.
C) the intrinsic value.
D) the stock price minus the strike price.
E) There is no upper limit for a call price.

Question 54

The maximum loss from buying a put option is:

A) the strike price.
B) the stock price.
C) unlimited.
D) the option price.
E) Insufficient information.

Question 55

According to put-call parity, a put option can be replicated by:

A) buying a call, selling the underlying stock, and lending at the risk-free rate.
B) selling a call, selling the underlying stock, and lending at the risk-free rate.
C) buying a call, buying the underlying stock, and borrowing at the risk-free rate.
D) selling a call, buying the underlying stock, and borrowing at the risk-free rate.
E) buying a call, selling the underlying stock, and borrowing at the risk-free rate.

Question 56

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

A) Call with a $35 exercise price and a stock price of $36
B) Put with a $40 exercise price and a stock price of $38
C) Call with a $25 exercise price and a stock price of $25
D) Put with a $30 exercise price and a stock price $29
E) Call with a $20 exercise price and a stock price of $19

Question 57

The most critical assumption of put-call parity is that

A) both options may have different exercise prices, but the same expiration dates
B) both options have the same exercise prices and the same expiration dates
C) both options will produce the same profit on the stock as well as a risky bond
D) both options will produce the same profit on the stock as well as a risk-free bond
E) both options will produce the same profit on the stock as well as another risky asset

Question 58

You own a call option on ABC stock. The exercise price is $25 and the current stock price is $23. The option payoff will _________ if the stock price increases by $5 and the payoff will _________ if the stock price decreases by $5.

A) Increase; decrease
B) Increase; remain the same
C) Remain the same; increase
D) Remain the same; decrease
E) Decrease; remain the same

Question 59

According to put-call parity, a call option can be replicated by:

A) selling a put, buying the underlying stock, and borrowing at the risk-free rate.
B) buying a put, selling the underlying stock, and lending at the risk-free rate.
C) buying a put, buying the underlying stock, and lending at the risk-free rate.
D) buying a put, buying the underlying stock, and borrowing at the risk-free rate.
E) selling a put, selling the underlying stock, and lending at the risk-free rate.

Question 60

Which of the following combinations will create an in-the-money option?
I) Call: exercise price > current stock price
II) Call: exercise price < current stock price
III) Put: exercise price > current stock price
IV) Put: exercise price < current stock price

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

Question 61

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

A) The option exercise style.
B) The exercise price.
C) The option contract size.
D) The option maturity date.
E) All of the above.

Question 62

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

A) Intermediary
B) Commission
C) Book-order
D) Option pricing
E) Auction

Question 63

When you write a covered call, you:

A) Forfeit upside potential gains in exchange for current income
B) Risk of having to buy shares of the underlying security at the market price
C) Risk selling your underlying shares at a currently unknown price
D) Are basically offering to buy shares in exchange for receiving the option premium
E) Accept unlimited risk

Question 64

Index options are settled:

A) by delivering a portfolio mimicking the index.
B) by delivering an index mutual fund.
C) in cash.
D) by delivering an endowment funds.
E) by delivering Treasury bills.

Question 65

An example of a straddle is:

A) Buying a Jan 25 put and a Jan 30 call
B) Buying a Jan 30 put and selling a Jan 30 call
C) Buying a Jan 30 put and a Feb 30 call
D) Buying a Jan 30 put and a Jan 25 call
E) Selling a Jan 30 put and a Jan 30 call

Question 66

Employee stock options

A) Can be resold as long as they are "at-the-money"
B) Are generally issued underwater
C) Have no value unless the intrinsic value is positive
D) Are only issued to corporate officers
E) Help align manager's interests with those of the shareholders

Question 67

Which one of the following represents an arbitrage opportunity?

A) stock price of $18 and strike price of $20
B) call option price of $0.40 and put option price of $0.40
C) stock price of $20 and strike price of $18
D) put option price of $20 and a strike price of $18
E) strike price of $18 and call option price of $20

Question 68

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

A) Sell a naked call.
B) Sell a naked put.
C) Buy a call.
D) Enter a straddle.
E) Buy a put.

Question 69

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.

A) Exercise; exercise
B) Exercise; not exercise
C) Not exercise; exercise
D) Not exercise; not exercise
E) Exercise; continue to hold

Question 70

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:

A) the call is in-the-money.
B) the stock price is equal to the strike price.
C) the put is in-the-money.
D) one of the options is mis-priced since it is impossible for the call price to be equal to the put price.
E) Insufficient information.

Question 71

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

A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) selling at a discount.
E) a standardized contract.

Question 72

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.

A) less than or equal to
B) equal to
C) greater than or equal to
D) equal to if the stock pays a dividend
E) There is no definite relationship.

Question 73

Employee stock options

A) Have a significant up-front cost to employers
B) Can be resold through on option exchanges
C) Usually have a vesting period
D) Are no longer re-priced
E) Generally have a 5-year life

Question 74

A short straddle

A) Involves exercising two or more options simultaneously.
B) Increases downside risk.
C) Allows you to profit if a stock price remains constant.
D) Requires a bull market if you are to profit.
E) Involves selling shares you are currently own.

Question 75

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:

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

Question 76

Which of the following is an income producing strategy?

A) Buying naked calls.
B) Protective puts.
C) Covered calls.
D) Straddles.
E) Buying naked puts.

Question 77

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

A) shorten the vesting period
B) raise the exercise price
C) buy back all outstanding common shares in the market
D) lower the exercise price
E) lengthen the vesting period

Question 78

Which of the following is false regarding employee stock options?

A) Employee stock options require no immediate, out-of-pocket costs to the company.
B) They can usually be exercised immediately by the employee.
C) They are a major recruiting tool to attract new employees.
D) The strike price of employee stock options can be changed.
E) They are used to align interests of shareholders and management.

Question 79

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?

A) $2
B) $45
C) $7
D) $50
E) $5

Question 80

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

A) zero
B) $5
C) $2
D) $3
E) -$5