Question 1

A straddle is a combination of a put and call on:

Accepted Answer

A straddle involves buying both a put and a call option on the same stock with the same strike price and expiration date. This strategy is used when an investor believes that the stock price will experience a significant move but is unsure of the direction. By buying both options, the investor can profit from the stock's movement in either direction.

Question 2

A stock is selling for $45.75 with a put option available at a $50 strike that has a premium of $7.50.What is the intrinsic value of the put?

Accepted Answer

The intrinsic value of a put option is equal to the strike price minus the current stock price. In this case, the intrinsic value would be $50 - $45.75 = $4.25. Therefore, the best choice is A.

Question 3

A stock is selling for $45.75 with a call option available at a $40 strike that has a premium of $7.50.What is the speculative premium of the call?

Accepted Answer

The answer of A stock is selling for $45.75 with...

Question 4

Assume you purchase 200 shares of stock at $80 per share and wish to hedge part of your position by writing a 100 share option.The option has a strike price of 75 and a premium of $6.If at the time of expiration,the stock is selling at the following prices ($75,$80,$90)what will be your overall gain or loss?

Accepted Answer

The answer of Assume you purchase 200 shares of stock...

Question 5

An Arthur Corp.25 put option is selling for $3 when the stock is trading at $22

Accepted Answer

Intrinsic Value = Strike - Market = $25 - $22 = $3Speculative Premium = Option Price - Intrinsic Value = $3 - $3 = 0The time to expiration must be very close.

Question 6

All of the following are characteristics of LEAPS,except:

Accepted Answer

LEAPS (Long-term Equity Anticipation Securities) generally have higher premiums due to their longer expiration periods, not lower.

Question 7

Block Corp 40 call option is selling for $6 and the common stock is selling for $41,the intrinsic value is.

Accepted Answer

The intrinsic value of a call option is the stock price minus the strike price, which is $41 - $40 = $1. The speculative premium is the option price minus the intrinsic value, which is $6 - $1 = $5.

Question 8

Unlike a covered call writer,a naked call writer will always lose if

Accepted Answer

A naked call writer is someone who sells call options without holding the underlying stock. If the stock price rises above the strike price plus the speculative premium, the call option will be exercised and the call writer will be obligated to sell the stock at a loss. Therefore, the answer is A.

Question 9

Assume that a stock is selling for $47 with options available at 20,30,and 40 strike prices.The 40 call option is at 7 1/2.Calculate the following:
(a)The intrinsic value of the $40 call
(b)Is the call in the money?
(c)The speculative premium on the 40 call option
(d)The percent the speculative premium represents of the common stock price.

Accepted Answer

The answer of Assume that a stock is selling for...

Question 10

An investor striving for maximum leverage will generally buy options that are:

Accepted Answer

Buying out-of-the-money options or slightly in-the-money options will provide the investor with more leverage because they cost less than in-the-money or deep in-the-money options. However, it is important to note that this strategy comes with a higher risk as these options have lower chances of ending up profitable.

Question 11

Tom Smith purchases 100 shares of DOUBLE Systems stock for $63 per share and wishes to hedge his position by writing a 100-share call option on his holdings.The option has a $65 strike price and a premium of $8.75.If the stock is selling at $64 at the time of expiration,what will be the overall dollar gain or loss on this covered option play? (Consider the change in stock value as well as the gain or loss on the option.)

Accepted Answer

If the stock is selling at $64 at the time of expiration and the strike price is $65, then the call option will not be exercised by the buyer. Thus, Tom Smith will keep the premium of $8.75 from writing the call option.

The overall cost of purchasing 100 shares of DOUBLE Systems stock is:
100 shares X $63/share = $6,300

The overall gain from writing the call option is:
100 shares X $8.75/share = $875

The overall dollar gain or loss is the difference between the cost of purchasing the stock and the gain from writing the call option:
$875 - $6,300 = -$5,425

Therefore, the overall loss on this covered option play is $5,425 or -$54.25 per share.

Question 12

In general,the speculative premiums (in percent)are higher for:

Accepted Answer

High-beta, low-dividend yield stocks are considered riskier because they have higher volatility and do not offer much in terms of dividends. Therefore, investors demand a higher speculative premium to compensate for the additional risk. Low-beta, high-dividend yield stocks, on the other hand, are considered safer and less volatile, so investors do not require as high a premium. High-beta, high-dividend yield stocks would fall somewhere in between these two options, and low-beta, low-dividend yield stocks are considered the least risky and would have the lowest speculative premium.

Question 13

The difference between a put and a call option is that:

Accepted Answer

A put option gives the holder the right but not the obligation to sell a specific stock at a specified price, while a call option gives the holder the right but not the obligation to buy a specific stock at a specified price. Therefore, choice A is the correct answer.

Question 14

A major disadvantage of using call options to hedge a short position is

Accepted Answer

The option premium and commission are costs that reduce the overall profit potential when using call options to hedge a short position.

Question 15

IBM was trading at $100 when Mrs.Peterson bought a 100 call on IBM at a price of $10.Three months later,IBM common stock was trading at $130 and the call option was trading at $33.The leverage factor for this situation would be.

Accepted Answer

The leverage factor is calculated by dividing the percentage change in the option price by the percentage change in the underlying stock price.

Percentage change in the stock price = (130-100)/100 = 30%
Percentage change in the option price = (33-10)/10 = 230%

So, the leverage factor = 230%/30% = 7.66x.

Therefore, the best choice is C.

Question 16

A stock is selling for $45.75 with a call option available at a $40 strike that has a premium of $7.50.What percentage of the common stock price does the speculative premium represent?

Accepted Answer

The answer of A stock is selling for $45.75 with...

Question 17

A stock is selling for $45.75 with a call option available at a $40 strike that has a premium of $7.50.What is the intrinsic value of the call?

Accepted Answer

The intrinsic value of a call option is calculated by subtracting the strike price from the current stock price, if the stock price is above the strike price. Here, it's $45.75 - $40 = $5.75.

Question 18

An investor who wishes to take advantage of a current stock price,but does not expect to have cash available until a specific date in the future,would probably use the _________ strategy to invest in options.

Accepted Answer

The "Guaranteed price" strategy, often associated with options, allows an investor to lock in a stock price now for a future date, which is useful if they expect to have cash available later.

Question 19

Under what circumstances can the writer of a call option expect to profit?

Accepted Answer

The writer of a call option profits if the stock price declines, remains the same, or increases less than the premium received, as they keep the premium in all these scenarios.

Question 20

A stock is selling for $45.75 with a put option available at a $50 strike that has a premium of $7.50.What is the speculative premium of the put?

Accepted Answer

The speculative premium of a put option is the difference between the option premium and the intrinsic value of the option.

In this case, the intrinsic value of the put option is the difference between the strike price ($50) and the current stock price ($45.75), which is $4.25.

Therefore, the speculative premium of the put option is the option premium ($7.50) minus the intrinsic value of the option ($4.25), which is $3.25.

So the correct answer is C) $3.25.

Quiz 15: Put and Call Options