Question 1

Options allow investors to speculate on price movements without a large initial investment.

Accepted Answer

Options give investors the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, allowing them to speculate on price movements with a smaller initial investment compared to buying the asset outright.

Question 2

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

Accepted Answer

Puts and calls are types of options, which are financial contracts that derive their value from the underlying asset's price movements, making them derivative securities.

Question 3

The owner of a put is obliged to sell the underlying security at the strike price on the date of expiration.

Accepted Answer

The owner of a put option has the right, but not the obligation, to sell the underlying security at the strike price on or before the expiration date, depending on whether it's an American or European option.

Question 4

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

Accepted Answer

Many options expire unexercised, allowing the writer to keep the premium received from selling the option as profit without having to fulfill the contract.

Question 5

The writer of an option creates the option by promising to buy or sell the underlying stock if the option holder chooses to exercise their right to sell or buy the underlying stock.

Accepted Answer

The writer (or seller) of an option contract is obligated to buy or sell the underlying asset if the holder decides to exercise their option, depending on whether it's a call (buy) or put (sell) option.

Question 6

Rights and warrants are the riskiest types of options.

Accepted Answer

Rights and warrants are not options; they are securities that give the holder the right to purchase shares at a certain price before expiration, but they are different from options in terms of their origin, purpose, and how they are traded. Options are contracts that give the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific period.

Question 7

The buyer of a call option has the right to any dividends paid after the option was purchased, but only if the option is exercised.

Accepted Answer

The buyer of a call option does not have rights to dividends paid on the underlying stock unless they exercise the option and become the holder of the stock before the dividend's ex-date.

Question 8

Which one of the following statements concerning options is correct?

Accepted Answer

Option holders can profit from movements in the price of the underlying security, whether through buying (calls) or selling (puts) the security at a predetermined price. Options typically cover 100 shares, not 1,000 (A is incorrect). A put option gives the holder the right to sell, not buy, a stated amount of securities (B is incorrect). The owner of a call option does not receive dividends from the underlying stock; dividends are paid to the actual shareholders (C is incorrect).

Question 9

Which of the following is true about rights?

Accepted Answer

Rights are indeed a type of short-lived call option, giving the holder the right but not the obligation to purchase shares of a company at a specified price before the rights expire, typically within a few weeks or months.

Question 10

The writer of a put or call is the

Accepted Answer

The writer of a put or call option is the party who agrees to buy or sell the underlying stock if the option holder decides to exercise the option. This means they have the obligation to fulfill the contract if the holder chooses to exercise.

Question 11

Writers of option contracts

Accepted Answer

Writers of option contracts earn a profit when the option expires without being exercised because they get to keep the premium paid by the buyer of the option. This premium is the profit for the writer if the option is not exercised.

Question 12

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

Accepted Answer

Rights are indeed options given to current shareholders that allow them to purchase additional shares at a predetermined price before a certain date, typically expiring if not exercised within a short period.

Question 13

Purchasers of stock options

Accepted Answer

Stock option purchasers have the right, but not the obligation, to buy or sell a specified amount of underlying shares at a predetermined price (the strike price) within a specified time frame. This distinguishes options from futures contracts, which do carry an obligation to buy or sell.

Question 14

An American call option gives the owner

Accepted Answer

An American call option gives the holder the right, but not the obligation, to buy the underlying asset at the strike price at any time up to and including the expiration date.

Question 15

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

Accepted Answer

Options give the investor the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at a specified price (strike price) before a certain date (expiration date), without actually owning the asset itself.

Question 16

It is riskier to buy an option than to write an option.

Accepted Answer

Buying an option limits the investor's loss to the premium paid for the option, whereas writing (selling) an option can result in unlimited losses, making it riskier.

Question 17

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

Accepted Answer

Warrants are indeed options issued by a company that give the holder the right to purchase the company's stock at a specific price before a certain date, and they are often attached to bonds to make them more attractive to investors by offering the potential for equity participation.

Question 18

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

Accepted Answer

Puts and calls are options contracts created by traders or investors, not by the corporations that issue the underlying stocks. These contracts give the holder the right, but not the obligation, to buy or sell a stock at a specified price before a specified date.

Question 19

Which of the following statements concerning put options are correct?

Accepted Answer

The writer (seller) of a put option profits when the price of the underlying stock rises because the option is less likely to be exercised by the owner, allowing the writer to keep the premium paid for the option without having to buy the stock at the strike price.

Question 20

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

Accepted Answer

Warrants are typically long-term instruments that can last for several years before they expire, unlike standard options which usually have shorter expiration periods.

Quiz 14: Options: Puts and Calls