Question 1

A short straddle:

Accepted Answer

A short straddle involves writing (selling) both a call option and a put option at the same strike price and expiration date. The maximum profit is achieved when the underlying stock price is exactly at the strike price, making both options worthless. This strategy is neutral and does not have a bullish or bearish bias. Therefore, choice C is the correct answer.

Question 2

Which one of the following is the upper price bound for the intrinsic value of a European put option on a stock?

Accepted Answer

The answer of Which one of the following is the...

Question 3

Which one of the following correctly defines the range of time values for a put option?

Accepted Answer

The range of time values for a put option is always non-negative, as the time value represents the potential for the option to increase in value before expiration.

Question 4

The maximum option payoff from:

Accepted Answer

When you write (sell) a put option, the maximum payoff you can receive is the premium you collect upfront, because the best-case scenario is that the option expires worthless (the stock price is above the strike price), and you keep the premium. If the stock price falls below the strike price, you may have to buy the stock at the strike price, which can result in losses, but the initial transaction of writing the put cannot yield more than the premium collected.

Question 5

Which one of the following represents an arbitrage opportunity?

Accepted Answer

The PCP-implied put price should be lower than or equal to the put market price. Here, the PCP-implied put price is $0.30 and the put market price is $0.31, which represents an arbitrage opportunity. The trader can buy the put option for $0.31 and sell it in the PCP market for $0.30, making a risk-free profit of $0.01.

Question 6

Which one of the following is a bear call spread?

Accepted Answer

The answer of Which one of the following is a...

Question 7

What is the total option premium you will receive if you sell 6 October $25 calls on Texas Instruments?

Accepted Answer

Call premium = 6 × 100 × $6.95 = $4,170

Question 8

You wrote a covered call with a strike price of $45 and an option premium of $1.10.Assume the stock price is $44 a share currently and that it falls to $42 a share and remains at that price until the option expires.As a result,you will:

Accepted Answer

The answer of You wrote a covered call with a...

Question 9

Katie purchased 6 call options on Atlas Co.stock with a strike price of $40.00.On the expiration date,the stock was priced at $38.95 a share.What is the total payoff on the option contracts?

Accepted Answer

Payoff = $0; The stock price is less than the strike price.

Question 10

How much will it cost to purchase 5 May $27.50 calls on Texas Instruments?

Accepted Answer

Cost = 45 × 100 × $4.15 = $2,075

Question 11

Which one of the following applies to a naked call?

Accepted Answer

A naked call is the sale of a call option on a stock you do not own, which gives the option buyer the right to buy the stock at a specific price. If the stock price rises above the strike price, the call option will be exercised, and the seller (who does not own the stock) will be forced to buy the stock at the higher market price to cover the option. This can result in unlimited potential losses for the seller.

Question 12

Which one of the following is a bull call spread?

Accepted Answer

A bull call spread involves buying a lower strike call option and selling a higher strike call option on the same underlying security, with both options having the same expiration date. Buying a $20 call and selling a $25 call satisfies this criteria and is therefore a bull call spread. Option B is a bear call spread, Option C is a bull put spread, Option D is a collar, and Option E is a bear put spread.

Question 13

What is the total amount you will receive if you sell 10 June $27.50 puts on Texas Instruments?

Accepted Answer

Sale value = 10 × 100 × $0.07 = $70

Question 14

You bought a call option with a strike price of $35.What is your total payoff on this option contract if the underlying stock is selling for $36.70 on the option expiration date?

Accepted Answer

Payoff = 100 × ($36.70 - $35) = $170

Question 15

Which one of the following is the upper price bound for the intrinsic value of a European call option on a stock?

Accepted Answer

The answer of Which one of the following is the...

Question 16

Which one of the following is the primary purpose of a protective put?

Accepted Answer

The primary purpose of a protective put is to offset the risk associated with a decrease in the value of the underlying asset. It provides downside protection by allowing the holder to sell the underlying asset at a predetermined price, thereby limiting potential losses. Options A, B, D, and E do not accurately describe the primary purpose of a protective put.

Question 17

Anna bought a $40 April call and a $40 April put on the same underlying stock.This strategy is referred to as which one of the following?

Accepted Answer

Anna's strategy of buying both a call and a put at the same strike price and expiration is known as a long straddle. This is because she is hoping that the stock price will move significantly in either direction, allowing her to profit from either the call or the put. A bull spread, on the other hand, involves buying a call at a lower strike price and selling a call at a higher strike price, whereas a bear spread involves buying a put at a higher strike price and selling a put at a lower strike price. A parity play is a strategy used in the options market to profit from mispricings between call and put options with the same strike price and expiration date, and a short straddle involves selling both a call and a put at the same strike price and expiration date.

Question 18

The maximum:

Accepted Answer

The maximum profit from writing a put is the option premium received, as the writer of a put keeps the premium if the option is not exercised. The other statements are not true.

Question 19

Which one of the following values is discounted in the put-call parity formula?

Accepted Answer

The strike price is discounted in the put-call parity formula. The formula is: 
Call Price - Put Price = Stock Price - Strike Price / (1 + Risk-Free Rate) ^ Time to Expiration

Question 20

You own 300 shares of ABC stock.Which one of the following would allow you to receive an option premium in exchange for selling your shares in ABC at the strike price?

Accepted Answer

Writing a covered call allows you to receive an option premium in exchange for selling your shares of ABC at the strike price. A covered call means you already own the underlying stock (in this case, ABC shares) and you sell a call option against it. A straddle involves buying both a call and a put option with the same strike price and expiration date, which does not involve selling your shares. A long spread involves buying and selling different options contracts to create a spread position. Selling a put involves selling an option contract to buy shares at a specific price, which does not involve selling your current shares. Buying a call involves purchasing an option contract to buy shares at a specific price, which also does not involve selling your current shares.

Quiz 15: Stock Options

A short straddle:

Which one of the following is the upper price bound for the intrinsic value of a European put option on a stock?

Which one of the following correctly defines the range of time values for a put option?

The maximum option payoff from:

Which one of the following represents an arbitrage opportunity?

Which one of the following is a bear call spread?

What is the total option premium you will receive if you sell 6 October $25 calls on Texas Instruments?

You wrote a covered call with a strike price of $45 and an option premium of $1.10.Assume the stock price is $44 a share currently and that it falls to $42 a share and remains at that price until the option expires.As a result,you will:

Katie purchased 6 call options on Atlas Co.stock with a strike price of $40.00.On the expiration date,the stock was priced at $38.95 a share.What is the total payoff on the option contracts?

How much will it cost to purchase 5 May $27.50 calls on Texas Instruments?

Which one of the following applies to a naked call?

Which one of the following is a bull call spread?

What is the total amount you will receive if you sell 10 June $27.50 puts on Texas Instruments?

You bought a call option with a strike price of $35.What is your total payoff on this option contract if the underlying stock is selling for $36.70 on the option expiration date?

Which one of the following is the upper price bound for the intrinsic value of a European call option on a stock?

Which one of the following is the primary purpose of a protective put?

Anna bought a $40 April call and a $40 April put on the same underlying stock.This strategy is referred to as which one of the following?

The maximum:

Which one of the following values is discounted in the put-call parity formula?

You own 300 shares of ABC stock.Which one of the following would allow you to receive an option premium in exchange for selling your shares in ABC at the strike price?