Question 1

A ____ requires a premium above and beyond the price to be paid for the financial instrument.

Accepted Answer

Call and put options both require the payment of a premium by the buyer to the seller. This premium is for the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an underlying asset at a specified price within a certain period. Futures contracts, on the other hand, do not involve the payment of a premium but are agreements to buy or sell an asset at a future date at a price agreed upon today.

Question 2

Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.

Accepted Answer

Covered call writing involves selling call options on a stock that the seller already owns. This strategy generates income from the option premiums but limits the upside potential because if the stock price rises above the strike price of the call, the stock may be called away. However, it decreases the risk because the income from the option premium provides some downside protection.

Question 3

Sellers (writers)of call options can close out their position at any point in time by

Accepted Answer

Sellers (writers) of call options can close out their position by buying identical call options. This action offsets their initial position, effectively neutralizing their obligation to sell the underlying asset at the option's strike price.

Question 4

Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)?

Accepted Answer

The pension fund bought the stock at $53 and sold a call option with a $4 premium. If the stock price rises to $56 and the option is exercised, the fund sells the stock at the $50 exercise price. The total income from the option is the $4 premium plus the $50 from selling the stock, totaling $54. Since the fund initially bought the stock at $53, the net gain is $1 per share ($54 - $53).

Question 5

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

Accepted Answer

The longer the time to maturity, the higher the call option premium and the higher the put option premium because there is more time for the underlying asset's price to move favorably, increasing the option's value.

Question 6

The ____ is the most important exchange for trading options.

Accepted Answer

The Chicago Board Options Exchange (CBOE) is the largest and most significant exchange for trading options, known for its wide range of options available for trading.

Question 7

The ____, the higher the call option premium, other things being equal.

Accepted Answer

The longer the time to maturity of the option, the higher the call option premium, because there is more time for the underlying asset to increase in value, which increases the chance of the option being in-the-money at expiration.

Question 8

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?

Accepted Answer

The answer of A speculator purchases a put option for...

Question 9

The Options Clearing Corporation (OCC)serves as a guarantor on option contracts traded in the United States.

Accepted Answer

The Options Clearing Corporation (OCC) acts as a central counterparty that guarantees the obligations of the contracts it clears, ensuring that the obligations of the contracts are met, thus serving as a guarantor on option contracts traded in the United States.

Question 10

Put options are typically used to hedge when portfolio managers are mainly concerned about

Accepted Answer

The answer of Put options are typically used to hedge...

Question 11

Assume an insurance company purchases a call option on a stock index futures contract for a premium of 14, with an exercise price of 1800. The value of a stock index futures contract is 250 times the index. If the stock index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?

Accepted Answer

The answer of Assume an insurance company purchases a call...

Question 12

The sale of a call option on a stock the seller already owns is referred to as

Accepted Answer

A covered call involves selling a call option on a stock that the seller already owns, providing a potential income stream or hedge against a slight decline in the stock's price. Naked calls, calls on futures, and futures on options are different types of derivatives transactions.

Question 13

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. ​

Accepted Answer

Higher volatility increases the potential for movement in the stock price, which increases the value of both call and put options, as both types of options benefit from greater movement in the underlying stock's price.

Question 14

When the market price of the underlying security exceeds the exercise price, a

Accepted Answer

A call option is considered "in the money" when the market price of the underlying security is higher than the option's exercise price, as it allows the option holder to buy the asset at a price lower than the current market price.

Question 15

A put option is "out of the money" when the

Accepted Answer

A put option is considered "out of the money" when the market price of the underlying security is higher than the option's strike (exercise) price, making it unfavorable to exercise the option.

Question 16

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? ​

Accepted Answer

To break even on a put option, the stock price must be below the exercise price by at least the amount of the premium paid. Here, the exercise price is $30, and the premium is $4, so the break-even stock price is $30 - $4 = $26.

Question 17

A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain?

Accepted Answer

The answer of A speculator purchases a put option on...

Question 18

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time. ​

Accepted Answer

A call option grants the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time period.

Question 19

____ can execute transactions desired by investors and trade stock options for their own account.

Accepted Answer

Market makers are entities that stand ready to buy and sell securities on a regular and continuous basis at a publicly quoted price, thus they can execute transactions desired by investors and also trade stock options for their own account.

Question 20

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? ​

Accepted Answer

The break-even point for a call option is calculated by adding the premium paid for the option ($3) to the exercise price ($50). Therefore, the break-even stock price is $53.

Quiz 14: Options Markets

A ____ requires a premium above and beyond the price to be paid for the financial instrument.

Covered call writing the upside potential return and the risk of an investment in stock.

Sellers (writers) of call options can close out their position at any point in time by

The longer the time to maturity, the the call option premium and the the put option premium.

The ____ is the most important exchange for trading options.

The ____, the higher the call option premium, other things being equal.

The Options Clearing Corporation (OCC)serves as a guarantor on option contracts traded in the United States.

Put options are typically used to hedge when portfolio managers are mainly concerned about

The sale of a call option on a stock the seller already owns is referred to as

The greater the volatility of the underlying stock, the the call option premium and the the put option premium.

When the market price of the underlying security exceeds the exercise price, a

A put option is "out of the money" when the

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even?

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.

____ can execute transactions desired by investors and trade stock options for their own account.

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even?

Quiz 14: Options Markets

A ____ requires a premium above and beyond the price to be paid for the financial instrument.

Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.

Sellers (writers) of call options can close out their position at any point in time by

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

The ____ is the most important exchange for trading options.

The ____, the higher the call option premium, other things being equal.

The Options Clearing Corporation (OCC)serves as a guarantor on option contracts traded in the United States.

Put options are typically used to hedge when portfolio managers are mainly concerned about

The sale of a call option on a stock the seller already owns is referred to as

The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. ​

When the market price of the underlying security exceeds the exercise price, a

A put option is "out of the money" when the

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? ​

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time. ​

____ can execute transactions desired by investors and trade stock options for their own account.

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? ​

Covered call writing the upside potential return and the risk of an investment in stock.

The longer the time to maturity, the the call option premium and the the put option premium.

The greater the volatility of the underlying stock, the the call option premium and the the put option premium.

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even?

A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.

A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even?