Question 1

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 2

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

Accepted Answer

B

Question 3

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

Accepted Answer

Market-makers execute transactions desired by investors and trade stock options for their own account. Floor brokers execute orders for clients, while specialists facilitate trading in specific stocks on an exchange.

Question 4

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 5

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

Accepted Answer

The answer of The ____, the higher the call option...

Question 6

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

Accepted Answer

Both call options and put options require a premium to be paid above and beyond the price of the underlying asset. Futures contracts, on the other hand, do not require a premium but may require a margin deposit.

Question 7

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

Accepted Answer

When the market price of the underlying security exceeds the exercise price, it means that the call option holder has the right to buy the underlying asset at a lower price than its current market value, resulting in a profit. Hence, the call option is in the money.

Question 8

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 sells a call option on the stock it owns, meaning it receives the premium of $4 per share upfront.

If the call option is exercised when the price of the stock is $56, the pension fund will have to sell the stock for the exercise price of $50. However, since they purchased the stock at $53, they will have a loss of $3 per share on the stock.

On the other hand, they received a premium of $4 per share from selling the call option, so their net gain is $1 per share.

Therefore, the gain or loss per share for the pension fund (including its gain from holding the stock as well) is $1 gain.

Question 9

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

Accepted Answer

The OCC is a designated clearinghouse that acts as a guarantor on option contracts traded on U.S. exchanges.

Question 10

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

Accepted Answer

The answer of The longer the time to maturity, the...

Question 11

The ____, the lower the premium on a put option, other things being equal.

Accepted Answer

The higher the existing price of the security relative to the exercise price, the less likely the option will be exercised and the lower the premium on the put option. This is because the option holder would be better off selling the security on the open market rather than exercising the option to sell it at a lower price. The variability of the security's market value (choice B) can actually increase the premium on put options, as it increases the likelihood of the security's price falling below the exercise price. The maturity of the option (choice C) may also affect the premium, but is not as directly related as the existing price compared to the exercise price.

Question 12

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

Accepted Answer

The answer of When the exercise price exceeds the market...

Question 13

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 14

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.The speculator will exercise the option on the expiration date (if it is feasible to do so).What is the speculator's profit per unit?

Accepted Answer

The answer of A speculator buys a call option for...

Question 15

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

Accepted Answer

Selling a call option on a stock already owned is known as a covered call because the seller has the underlying asset (the stock) to cover or fulfill the obligation of the call option contract. A naked call, on the other hand, is selling a call option without owning the underlying asset, which carries significant risk. Call on futures and futures on options are different types of derivatives contracts.

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 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

Firstly, it is important to note that a put option gives the owner the right, but not the obligation, to sell the underlying asset (in this case, the stock) at the exercise price of $30. 
Since the stock price rose to $32, the speculator would not exercise the option, as they would not want to sell the stock for $30 when they could sell it for a higher price on the open market. 
Therefore, the maximum profit per unit for the speculator is the premium they paid for the put option, which is $4. 
However, since the speculator did not exercise the option, they would only realize this profit if they decided to sell the option itself before it expired. 
The difference between the premium paid and the profit realized is $1, so the correct answer is B) $3.

Question 17

A call option is "in the money" when the

Accepted Answer

A call option is "in the money" when the market price of the underlying security exceeds the exercise price. This means that the holder of the call option has the right to buy the underlying security at a price lower than the current market price, and thus can make a profit by exercising the option and selling the security at the higher market price.

Question 18

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.

Question 19

The ____ is the most important exchange for trading options.

Accepted Answer

The Chicago Board of Options Exchange (CBOE) is specifically designed for options trading and has the most liquid and active options markets, making it the most important exchange for trading options. The other choices are primarily focused on other types of securities trading.

Question 20

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 gives the buyer the right, but not the obligation, to buy an underlying asset at a predetermined price within a specific time period. Therefore, it fits the description given in the question. The other options, B) put option, C) sale of a futures contract, and D) purchase of a futures contract, do not fit the given description.

Quiz 14: Options Markets

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