Deck 18: Option Overwriting

Question 1

The most common motivation for option overwriting is

A) risk management
B) tax reduction
C) leverage
D) income generation

Answer 1

income generation

Question 2

If someone writes a call while owning the underlying asset, the call is

A) covered
B) long
C) naked
D) cash-secured

Answer 2

covered

Question 3

A long position is a(n)

A) long-term investment
B) owned asset
C) borrowed asset
D) a position with a paper gain

Answer 3

owned asset

Question 4

If a person writes a covered call with a striking price of $45 and receives $3 in premium, exercise will occur if the stock price is above ____ on expiration day.

A) $42
B) $45
C) $48
D) $50

Question 5

If stock is purchased at $50 and a $55 call is written for a premium of $2, the maximum possible gain per share is

A) $2
B) $5
C) $7
D) $10

Question 6

If you buy a call option with a striking price of $50 for $3 1/2, your maximum loss is

A) $3 ½
B) $46 ½
C) $50
D) unlimited

Question 7

Which of the following strategies has the highest possible loss?

A) Buying a call
B) Writing a naked call
C) Writing a covered call
D) Buying a put

Question 8

Which of the following terms is least common?

A) Long call
B) Short call
C) Covered call
D) Covered put

Question 9

Writing a covered call results in a position similar to a

A) fiduciary put
B) long put
C) long call
D) long stock position

Question 10

Fiduciary puts are also called

A) regulatory puts
B) cash-secured puts
C) long puts
D) uncovered puts

Question 11

If someone writes a put, they usually want the underlying asset to

A) go up
B) go down
C) stay unchanged
D) fluctuate

Question 12

If someone writes a naked call, they usually want the underlying asset to

A) go up
B) go down
C) stay unchanged
D) fluctuate

Question 13

If someone writes an in-the-money put, they usually want the underlying asset to

A) go up
B) go down
C) stay unchanged
D) fluctuate

Question 14

If someone writes an in-the-money naked call, they usually want the underlying asset to

A) go up
B) go down
C) stay unchanged
D) fluctuate

Question 15

Which of the following has the greatest possible dollar loss?

A) Writing a covered call
B) Buying a call
C) Writing a fiduciary put
D) Put overwriting

Question 16

Index options have little ______ risk.

A) unsystematic
B) systematic
C) market
D) total

Question 17

Which of the following is true for writing index calls?

A) It always increases portfolio market risk
B) It need not involve borrowing any money
C) It is inappropriate for a tax-exempt investor
D) It lowers portfolio income

Question 18

Which of the following "counts most" in the margin equivalents table?

A) Cash
B) U.S. treasury securities
C) Corporate debt
D) Stock

Question 19

A person who sought to buy stock at a price below the current price might

A) buy deep-in-the-money calls
B) buy deep-in-the-money puts
C) write deep-in-the-money calls
D) write deep-in-the-money puts

Question 20

A person who sought to sell stock at a price above the current price might

A) buy deep-in-the-money calls
B) buy deep-in-the-money puts
C) write deep-in-the-money calls
D) write deep-in-the-money puts

Question 21

A covered call means the call was purchased

A) with cash
B) from a fully funded margin account
C) while simultaneously holding a put on the same stock
D) while simultaneously holding a long position in the stock

Question 22

Assume the stock price is $50, a call option on that stock has a premium of $5 and a put option on that stock has a premium of $3, and you presently hold no position in the three. Ignoring commissions, a covered call on 100 shares would require an investment of

A) $4,500
B) $4,700
C) $5,300
D) $5,700

Question 23

Assume the premium on a call option is $5 per share. Writing this call option when you already own 100 shares

A) requires an immediate investment of $500
B) generates no cash flow because you already own the stock
C) initially generates a positive cash flow of $500
D) eventually will require an investment of $500 unless the stock price increases enough

Question 24

Assume the stock price is $50, a call option on that stock has a premium of $5, a put option on that stock has a premium of $3, the strike price on both options is $50, and you presently hold no position in the three. Suppose you take one of the following positions and the stock price drops to $47 per share. Which position would have gained the most dollars?

A) Writing a naked call
B) Writing a covered call
C) Writing a fiduciary put
D) Selling the stock short

Question 25

The systematic risk in a portfolio can be lowered by

A) writing index call options
B) writing index put options
C) buying index call options
D) none of the above because index options cannot be used to lower systematic risk

Question 26

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.40 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a February 580 OEX 100 call option contract has a premium of 7.30, what is the maximum number of contracts you could write on a cash account basis using the stock portfolio as collateral?

A) 26
B) 36
C) 46
D) 56

Question 27

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.40 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a February 580 OEX 100 call option contract has a premium of 7.30, what is the maximum amount of funds you could generate by writing calls on a cash account basis using the stock portfolio as collateral?

A) $18,980
B) $26,280
C) $33,580
D) $40,880

Question 28

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.40 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a February 580 OEX 100 call option contract has a premium of 7.30, what is the maximum number of contracts you could write on a margin account basis using the stock portfolio as collateral?

A) 99
B) 149
C) 198
D) 396

Question 29

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.40 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a February 580 OEX 100 call option contract has a premium of 7.30, what is the maximum amount of funds you could generate by writing calls on a cash account basis using the stock portfolio as collateral?

A) $72,270
B) $108,770
C) $144,540
D) $289,080

Question 30

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.60 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a July 600 OEX 100 call option contract has a premium of 2.45, what is the maximum number of contracts you could write on a cash account basis using the stock portfolio as collateral?

A) 26
B) 36
C) 46
D) 56

Question 31

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.60 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a July 600 OEX 100 call option contract has a premium of 2.45, what is the maximum amount of funds you could generate by writing calls on a cash account basis using the stock portfolio as collateral?

A) $6,370
B) $8,820
C) $11,270
D) $13,720

Question 32

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.60 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a July 600 OEX 100 call option contract has a premium of 2.45, what is the maximum number of contracts you could write on a margin account basis using the stock portfolio as collateral?

A) 195
B) 293
C) 390
D) 781

Question 33

Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.60 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a July 600 OEX 100 call option contract has a premium of 2.45, what is the maximum amount of funds you could generate by writing calls on a cash account basis using the stock portfolio as collateral?

A) $47,775
B) $71,785
C) $95,550
D) $191,345

Question 34

Suppose a stock is currently priced at $40 per share, a February 35 call has a premium of $8, and a February 45 put has a premium of $7. If you wanted to buy this stock below the current market price using options, at what effective price could you buy the stock if the option is exercised? (Ignore brokerage commissions.)

A) 35
B) 37
C) 38
D) 39

Question 35

Suppose a stock is currently priced at $40 per share, a February 35 call has a premium of $8, and a February 45 put has a premium of $7. If you wanted to buy this stock below the current market price using options, at what future stock price would a strategy of buying the stock using options just break even with simply buying the stock today? (Ignore brokerage commissions.)

A) 32
B) 33
C) 47
D) 48

Question 36

Suppose a stock is currently priced at $40 per share, a February 35 call has a premium of $8, and a February 45 put has a premium of $7. If you wanted to sell this stock above the current market price using options, at what effective price could you sell the stock if the option is exercised? (Ignore brokerage commissions.)

A) 41
B) 42
C) 43
D) 45

Question 37

Suppose a stock is currently priced at $40 per share, a February 35 call has a premium of $8, and a February 45 put has a premium of $7. If you wanted to sell this stock above the current market price using options, at what future stock price would a strategy of selling the stock using options just break even with simply selling the stock today? (Ignore brokerage commissions.)

A) 32
B) 33
C) 47
D) 48

Question 38

Suppose a stock is currently priced at $65 per share, a July 60 call has a premium of $8, and a July 70 put has a premium of $7. If you wanted to buy this stock below the current market price using options, at what effective price could you buy the stock if the option is exercised? (Ignore brokerage commissions.)

A) 57
B) 58
C) 62
D) 63

Question 39

Suppose a stock is currently priced at $65 per share, a July 60 call has a premium of $8, and a July 70 put has a premium of $7. If you wanted to buy this stock below the current market price using options, at what future stock price would a strategy of buying the stock using options just break even with simply buying the stock today? (Ignore brokerage commissions.)

A) 57
B) 58
C) 72
D) 73

Question 40

Suppose a stock is currently priced at $65 per share, a July 60 call has a premium of $8, and a July 70 put has a premium of $7. If you wanted to sell this stock above the current market price using options, at what effective price could you sell the stock if the option is exercised? (Ignore brokerage commissions.)

A) 68
B) 72
C) 73
D) 77

Question 41

Suppose a stock is currently priced at $65 per share, a July 60 call has a premium of $8, and a July 70 put has a premium of $7. If you wanted to sell this stock above the current market price using options, at what future stock price would a strategy of selling the stock using options just break even with simply selling the stock today? (Ignore brokerage commissions.)

A) 57
B) 58
C) 72
D) 73