Question 1

The profit and loss profile of the short call position (that is, the position of the call option writer) is the ________ the profit and loss profile of the long call position (the position of the call option buyer).

Accepted Answer

The profit and loss profile of the short call position is the mirror image of the profit and loss profile of the long call position. This means that if the long call position generates a profit, the short call position will generate a similar loss, and vice versa. Therefore, option writers must be careful when selling call options as they have unlimited downside risk.

Question 2

Which of the below statements is TRUE?

Accepted Answer

The statement in option B is true - the maximum profit for the writer of an option is the option price, but they carry substantial downside risk. The other statements are false - in a futures contract, the buyer realizes a profit when the price increases, while in an option contract, the risk/reward characteristics are different from those of a futures contract.

Question 3

Suppose you purchase a call option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $106. What is your net profit or loss per share?

Accepted Answer

The net profit per share can be calculated as follows:

Profit per share = Current stock price at exercise - Exercise price - Option price 
= $106 - $100 - $3 
= $3

Therefore, the net profit per share is $3. Option price is already paid at the time the option was purchased, thus it does not factor into the final profit or loss calculation.

Question 4

When the option buyer has the right to sell the underlying to the writer, the option is called a ________.

Accepted Answer

A put option grants the buyer the right to sell the underlying asset to the writer at a specified price within a certain time frame. This is in contrast to a call option, which grants the buyer the right to buy the underlying asset from the writer at a specified price within a certain time frame. Therefore, a put option is the correct answer to the given question. Choices B and C are not options terminology and choice A describes a call option.

Question 5

Which of the below statements is TRUE?

Accepted Answer

The buyer of a call option does not receive any interim cash flows, such as dividends, from the underlying asset.

Question 6

Suppose you purchase a put option on Asset XYZ that has an exercise price of $40. The option price is $2 per share. Suppose that on the expiration date, the current price is $39. What is your net profit or loss?

Accepted Answer

The option allows you to sell at $40 when the market price is $39, giving a $1 profit per share. Subtract the $2 option cost, resulting in a $1 loss per share.

Question 7

In an option contract, the writer of the option grants the buyer of the option the ________, but not the ________, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date).

Accepted Answer

In an option contract, the writer (seller) of the option grants the buyer the right, but not the obligation, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date). This means the buyer can choose to exercise the option but is not required to do so.

Question 8

One distinction between futures and options contracts is that ________ to an option contract ________ to transact at a later date.

Accepted Answer

In an option contract, the buyer has the right but not the obligation to execute the contract, while the seller is obligated if the buyer chooses to do so. Futures contracts obligate both parties to transact.

Question 9

The date after which an option is void is called the ________.

Accepted Answer

The date after which an option is void is called the maturity date. This is the date by which the option must be exercised or it will expire worthless.

Question 10

The price at which the underlying (that is, the asset or commodity) may be bought or sold is called the ________.

Accepted Answer

The correct term for the price at which the underlying may be bought or sold is the exercise price or strike price. The other three options are not commonly used terms in finance.

Question 11

The maximum amount that an option buyer can lose is the ________ price. The maximum profit that the option writer (seller) can realize is the ________ price.

Accepted Answer

The maximum amount an option buyer can lose is the price paid for the option (the option price), as they are not obligated to exercise the option. The maximum profit that the option writer (seller) can realize is also the option price, as this is the income they receive for selling the option.

Question 12

In regards to the writing (selling) of put options, which of the below statements is TRUE?

Accepted Answer

All the statements accurately describe characteristics of writing (selling) put options. A) correctly states the relationship between the profit and loss profiles of long and short put options. B) accurately describes the potential for substantial loss if the underlying asset's price falls significantly. C) correctly identifies the maximum profit scenario for a short put option.

Question 13

Futures contracts allow ________.

Accepted Answer

Futures contracts allow market participants to trade off the benefits of a favorable price movement for protection against an adverse price movement.

Question 14

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $3 per share. Suppose that on the expiration date, the current price is $49. What is your net profit or loss per share?

Accepted Answer

Since the exercise price is $50 and the current price is $49, the option is out of the money (OTM). Therefore, you would not exercise the option and your net loss would be the premium paid, which is $3 per share. So, your net profit or loss per share would be -$3.00.

Question 15

There are four basic option positions. Which of the below is ONE of these four positions?

Accepted Answer

The answer of There are four basic option positions. Which...

Question 16

Suppose you purchase a put option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $96. What is your net profit or loss per share?

Accepted Answer

Since the exercise price is $100 and the current price on the expiration date is $96, you are able to sell the asset for $4 more than the exercise price. Therefore, your profit per share is $4-$3 = $1.

Question 17

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $2 per share. Suppose that on the expiration date, the current price is $50. What is your net profit or loss per share?

Accepted Answer

Since the current price at expiration ($50) is equal to the exercise price, exercising the option wouldn't yield any profit. The net loss is the cost of the option, which is $2 per share.

Question 18

There are options that may be exercised at any time up to and including the expiration date. Such options are referred to as ________ options. Other options may be exercised only at the expiration date; these are called ________ options.

Accepted Answer

Options that can be exercised at any time up to and including the expiration date are called American options, while those that can only be exercised at the expiration date are referred to as European options.

Question 19

In the case of a ________, both buyer and seller are obligated to perform.

Accepted Answer

In a futures contract, both the buyer and seller are obligated to perform. In a call option contract, the buyer has the right but not the obligation to buy the underlying asset, while in a put option contract, the buyer has the right but not the obligation to sell the underlying asset. Therefore, options contracts are not obligating for both parties.

Question 20

Which of the below statements is FALSE?

Accepted Answer

All of the statements are true.

Quiz 27: Options Markets

The profit and loss profile of the short call position (that is, the position of the call option writer) is the ________ the profit and loss profile of the long call position (the position of the call option buyer) .

Which of the below statements is TRUE?

Suppose you purchase a call option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $106. What is your net profit or loss per share?

When the option buyer has the right to sell the underlying to the writer, the option is called a ________.

Which of the below statements is TRUE?

Suppose you purchase a put option on Asset XYZ that has an exercise price of $40. The option price is $2 per share. Suppose that on the expiration date, the current price is $39. What is your net profit or loss?

In an option contract, the writer of the option grants the buyer of the option the , but not the , to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date) .

One distinction between futures and options contracts is that to an option contract to transact at a later date.

The date after which an option is void is called the ________.

The price at which the underlying (that is, the asset or commodity) may be bought or sold is called the ________.

The maximum amount that an option buyer can lose is the price. The maximum profit that the option writer (seller) can realize is the price.

In regards to the writing (selling) of put options, which of the below statements is TRUE?

Futures contracts allow ________.

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $3 per share. Suppose that on the expiration date, the current price is $49. What is your net profit or loss per share?

There are four basic option positions. Which of the below is ONE of these four positions?

Suppose you purchase a put option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $96. What is your net profit or loss per share?

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $2 per share. Suppose that on the expiration date, the current price is $50. What is your net profit or loss per share?

There are options that may be exercised at any time up to and including the expiration date. Such options are referred to as options. Other options may be exercised only at the expiration date; these are called options.

In the case of a ________, both buyer and seller are obligated to perform.

Which of the below statements is FALSE?

Quiz 27: Options Markets

The profit and loss profile of the short call position (that is, the position of the call option writer) is the ________ the profit and loss profile of the long call position (the position of the call option buyer) .

Which of the below statements is TRUE?

Suppose you purchase a call option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $106. What is your net profit or loss per share?

When the option buyer has the right to sell the underlying to the writer, the option is called a ________.

Which of the below statements is TRUE?

Suppose you purchase a put option on Asset XYZ that has an exercise price of $40. The option price is $2 per share. Suppose that on the expiration date, the current price is $39. What is your net profit or loss?

In an option contract, the writer of the option grants the buyer of the option the ________, but not the ________, to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date) .

One distinction between futures and options contracts is that ________ to an option contract ________ to transact at a later date.

The date after which an option is void is called the ________.

The price at which the underlying (that is, the asset or commodity) may be bought or sold is called the ________.

The maximum amount that an option buyer can lose is the ________ price. The maximum profit that the option writer (seller) can realize is the ________ price.

In regards to the writing (selling) of put options, which of the below statements is TRUE?

Futures contracts allow ________.

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $3 per share. Suppose that on the expiration date, the current price is $49. What is your net profit or loss per share?

There are four basic option positions. Which of the below is ONE of these four positions?

Suppose you purchase a put option on Asset XYZ that has an exercise price of $100. The option price is $3 per share. Suppose that on the expiration date, you exercise your option at the current price of $96. What is your net profit or loss per share?

Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $2 per share. Suppose that on the expiration date, the current price is $50. What is your net profit or loss per share?

There are options that may be exercised at any time up to and including the expiration date. Such options are referred to as ________ options. Other options may be exercised only at the expiration date; these are called ________ options.

In the case of a ________, both buyer and seller are obligated to perform.

Which of the below statements is FALSE?

In an option contract, the writer of the option grants the buyer of the option the , but not the , to purchase from or sell to the writer something at a specified price within a specified period of time (or at a specified date) .

One distinction between futures and options contracts is that to an option contract to transact at a later date.

The maximum amount that an option buyer can lose is the price. The maximum profit that the option writer (seller) can realize is the price.

There are options that may be exercised at any time up to and including the expiration date. Such options are referred to as options. Other options may be exercised only at the expiration date; these are called options.