Deck 14: Options: Puts and Calls

Question 1

Which one of the following statements concerning options is correct?

A) One option covers 1,000 shares of stock.
B) A put gives the option holder the right to buy a stated amount of securities.
C) The owner of a call is entitled to the dividends paid on the underlying shares of stock.
D) Option holders can profit on movements of the price of the underlying security.

Answer 1

D

Question 2

Warrants

A) provide substantially less capital appreciation potential than the underlying stock.
B) tend to be quite costly.
C) have a stipulated price and an expiration date.
D) are not traded in the secondary markets because of their low unit costs.

Answer 2

C

Question 3

LEAPS are a special type of option

A) that must be exercised within six months.
B) that can only be exercised on the expiration date.
C) that cannot be exercised for at least a year after it is is purchased.
D) that may have an expiration date as long as three years.

Answer 3

D

Question 4

American style options can only be exercised on their expiration dates.

Question 5

Warrants are generally created when

A) a firm decides to execute a stock split.
B) the issuing corporation decides to sweeten a bond issue.
C) a LEAP expires and automatically converts.
D) a financial institution decides to create them based on market conditions.

Question 6

Options are created by investors.

Question 7

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as

A) leverage.
B) straddling.
C) hedging.
D) triple witching.

Question 8

Rights are long-term call options attached to bonds while warrants are short-term call options attached to stock.

Question 9

Rights are call options issued to current owners of the stock and normally expire within a short period of time.

Question 10

Puts and calls are issued by the same corporation that issued the underlying stock.

Question 11

Which of the following is true about rights?

A) They are usually attached to bonds as a "sweetener"
B) The owner has several years in which to exercise the option.
C) They are a type of short-lived call option.
D) They are a type of short-lived put option.

Question 12

One reason that writing options can be a viable and profitable investment strategy is that

A) the option writer collects the quarterly dividends.
B) most options expire unexercised.
C) an option writer determines when the option is exercised.
D) an option writer can exercise the option to avoid a potential loss.

Question 13

Purchasers of stock options

A) own a financial asset with benefits of firm ownership.
B) have a claim on the profits of the firm issuing the underlying securities.
C) have the obligation to buy or sell a predetermined amount of shares at the strike price.
D) have the right to buy or sell a certain number of underlying shares.

Question 14

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.

Question 15

The maker of a put or call is the

A) company which issued the underlying security.
B) person who facilitates the trade on the floor of the exchange.
C) party who writes the option.
D) party who decides whether or not the option is exercised.

Question 16

Warrants are short-term options usually expiring within a year or less.

Question 17

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

Question 18

Warrants are options that are attached to bond issues to make the bonds more attractive to investors.

Question 19

Which of the following statements concerning options are correct?
I)Options are derivative securities.
II)The value of an option is dependent upon the value of the underlying security.
III)The seller of the option retains the option premium whether or not the option is exercised.
IV)Options can provide leverage benefits.

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

Question 20

Many options expire without being exercised.

Question 21

The writer of a put

A) accepts the obligation to sell a predetermined number of shares at a predetermined price.
B) is betting the price of the underlying security will increase in value.
C) is hoping that the put will be in-the-money prior to expiration.
D) will pay the premium whether or not the option is exercised.

Question 22

For all practical purposes, listed stock options always expire

A) on the last business day of the expiration month.
B) on the first Monday of every calendar quarter.
C) on the third Friday of the expiration month.
D) three months from the date of the option purchase.

Question 23

Standardized options expire on the last business day of the expiration month.

Question 24

The buyer of a put expects the price of the underlying stock to rise.

Question 25

The strike price of a put option is the price

A) an investor must pay for the options contract.
B) of the underlying stock at the time that the options contract is purchased.
C) the price at which the underlying stock can be sold.
D) the price at which the underlying stock can be bought.

Question 26

European options can only be sold on the expiration date.

Question 27

Listed options

A) are traded directly between the buyer and the seller.
B) are rarely traded in the secondary markets.
C) have readily available price information.
D) are sold over the counter.

Question 28

Which one of the following was the first listed exchange for stock options in the United States?

A) Stock Index Board
B) Philadelphia Board of Trade
C) New York Stock Exchange
D) Chicago Board Options Exchange

Question 29

The value of a call increases as the price of the underlying security rises.

Question 30

The majority of today's options are stock options traded primarily on the CBOE and on AMEX.

Question 31

Over-the-counter options are less structured than listed options and are primarily purchased by individual investors.

Question 32

The value of a put increases as the price of the underlying security rises.

Question 33

For a call purchased on an organized security exchange, the strike price specifies the

A) contractual price at which each of the shares of the underlying stock can be bought.
B) prevailing market price of one share of the underlying stock.
C) cost of buying one option contact based on the value of the underlying stock.
D) intrinsic value of the offsetting put.

Question 34

Stocks options that trade in the January cycle will have contracts available that expire in

A) January, February, April, and July.
B) March, June, September, December.
C) January, February, March, and April.
D) each of the next 12 months.

Question 35

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

Question 36

Listed options trade over-the-counter.

Question 37

Technically, listed options expire on the Saturday following the third Friday of the expiration month.

Question 38

The buyer of a listed American option has which of the following rights?
I)the right to change the expiration date
II)the right to change the strike price
III)the right to resell the option
IV)the right to let the option expire unexercised

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

Question 39

The two provisions which investors should carefully consider when evaluating stock options are the

A) strike price and the exchange ratio.
B) time until expiration and the strike price.
C) leverage ratio and the time to maturity.
D) premium and the discount.

Question 40

Which of the following is a possible official expiration date for a standardized option contract?

A) Saturday, October 17
B) Monday, March 1.
C) Friday, April 30
D) Wednesday, May 19.

Question 41

Which one of the following options is more expensive? Show all calculations.
(a)A six-month put that carries a $40 strike price on a stock that is currently trading at $35.84, given that the put trades at a 15 percent investment premium; or
(b)A six-month call that carries a $50 strike price on a stock that currently trades at $54.75, while the call trades with a 12 percent investment premium?

Question 42

What is the fundamental value of a put contract with a strike price of $25 when the option price is $1.50 and the underlying common stock sells for $26?

A) $150
B) $100
C) $0.00
D) -$100

Question 43

A put has fundamental value as long as

A) the market price of the underlying financial asset has a positive value.
B) the market price of the underlying financial asset is less than the strike price.
C) the strike price of the put is greater than the time premium of the put.
D) the strike price of the put is less than the market value of the underlying asset.

Question 44

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24?

A) $100
B) $200
C) $300
D) $400

Question 45

A put option has a strike price of $32.The current price of the stock is $34.The put option is said to be "in-the-money."

Question 46

What is the fundamental value of a call with a strike price of $30 and a market price of $33?

A) -$300
B) -$3
C) $3
D) $300

Question 47

The option premium is the price of the option.

Question 48

NZMA stock is currently selling for $128.Which of the following options is "in-the-money"?

A) March 130 call
B) February 125 call
C) March 125 put
D) February 100 put

Question 49

Jaime wrote a nine-month put on Beta stock.The strike price was $25 and the market price at the time the option was written was $24.The total price of the option was $150.At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.

A) $23.50
B) $24.00
C) $25.00
D) $26.50

Question 50

Grant purchased one call on XYZ stock at an exercise price of $25.The market price of XYZ stock when Grant purchased the call was $24 a share.XYZ is currently priced at $30 a share.Grant paid $120 to buy the call.How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction-related costs.

A) $380
B) $480
C) $500
D) $600

Question 51

Which of the following increase(s)the time premium of a call option?
I)a market price that exceeds the strike price
II)increasing volatility in the market price of the underlying security
III)decreasing market interest rates
IV)decreasing the time to option expiration

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

Question 52

The price behavior of the underlying security is the primary determinant of the price of an option.

Question 53

One of the major disadvantages of options is

A) their lifespan.
B) their cost.
C) their lack of liquidity.
D) the risk to option buyers.

Question 54

Lew paid $300 to purchase a call on Delta stock with a strike price of $25.What does the market price of Delta have to be for Lew to break-even on his option investment? Ignore transaction costs and taxes.

A) $22
B) $25
C) $28
D) Cannot be determined from the information provided

Question 55

Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share.Alpha is currently selling at $34 a share.Which of the following statements are true given this information?
I)Rex's option is worth at least $100 today.
II)Rex's option is worthless today.
III)Rex's option has more value today than when he bought it.
IV)Rex's option has less value today than when he bought it.

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

Question 56

Which of the following represent in-the-money options?
I)a call when the market price exceeds the strike price
II)a call when the strike price exceeds the market price
III)a put when the market price exceeds the strike price
IV)a put when the strike price exceeds the market price

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

Question 57

Which of the following affect the value of puts and calls written on shares of common stock?
I)price volatility of the underlying stock
II)current market price of the underlying stock
III)length of time until the option expiration date
IV)current market interest rate

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

Question 58

The most important factor affecting the market price of a put or call is the

A) market interest rate.
B) expiration date.
C) price behavior of the underlying common stock.
D) price behavior of the corresponding warrant.

Question 59

Andrea wrote a three-month call on Echo stock.The option cost $200 and the strike price was $10.What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes.

A) $10
B) $12
C) $8
D) Cannot be determined from the information provided

Question 60

Jason purchased a six-month put on ABC stock at a cost of $100.The strike price was $15.At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes.

A) $15
B) $16
C) $14
D) Cannot be determined from the information provided

Question 61

In nearly all cases, the purpose of a hedge is to

A) reduce or eliminate risk.
B) make a very high profit in an extremely short time frame.
C) speculate on a downward drop in a general market index.
D) speculate on an upward movement in a given currency.

Question 62

One of the primary advantages of options is the leverage they provide.

Question 63

If you expect the price of a security to decline, you could buy a call to protect your financial position.

Question 64

If a stock price does not rise or fall by the amount of the option premium, the option will not be exercised.

Question 65

An option straddle is the simultaneous purchase (or sale)of both a put and a call option on the same underlying security.

Question 66

The maximum amount the buyer of a put can lose is the cost of the option.

Question 67

The longer the time to expiration, the lower the option time premium tends to be.

Question 68

Roselle paid $250 to buy one put option with a strike price of $35.What is the maximum profit Roselle can earn on her option contract?

A) $100
B) $350
C) $3,250
D) Her profit potential is unlimited.

Question 69

Tiffany would like to own shares of Blackwood, Inc.but only if she can acquire them at a total cost of $30 a share or less.Blackwood is currently trading at $31.76.Cynthia should ________ with a strike price of $30.Ignore transaction costs.

A) buy a call
B) buy a put.
C) write a call
D) write a put

Question 70

Option writing can be very profitable because the majority of options are never exercised.

Question 71

Fred bought 600 shares of Edgewood stock at a price of $19.The stock is currently selling for $53 a share.To protect his profits, Fred should buy

A) 600 call options with a strike price of $55.
B) 600 put options with a strike price of $50.
C) 6 call options with a strike price of $55.
D) 6 put options with a strike price of $50.

Question 72

Options can provide a lot of price action for a limited dollar investment.

Question 73

Kyle believes the price of Ajax stock is about to decrease.If he wants to profit from the decline in price, he should ________ on Ajax stock.

A) buy a call
B) write a put
C) buy a put
D) sell a put

Question 74

The writer of a call option is theoretically exposed to an unlimited loss.

Question 75

In January, JB stock was selling for $50 per share.When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46.Which investors made a profit?
I)the writer of the call
II)the buyer of the call
III)the writer of the put
IV)the buyer of the put

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

Question 76

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration.

Question 77

The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50.ABC does not pay a dividend.You buy a six-month call on ABC, with a strike price of $45.The option cost $200.What holding period return do you expect on this call? Ignore transaction costs and taxes.

A) 150%
B) 200%
C) 250%
D) 300%

Question 78

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.

Question 79

A naked option is a conservative investment with limited risk.

Question 80

Shares of Lakewood, Inc.are currently selling for $52.63.You believe the stock will decline in price ranging from $30 to $32 in the next few months.Which of the following strategies will allow you to profit if your prediction is correct?
I)short the stock
II)buy a call at 50
III)write a call at 55
IV)buy a put at 45

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