Question 1

Which one of the following statements concerning options is correct?
A) One option covers 1,000 shares of stock.
B) A put gives the option holder the right to buy a stated amount of securities.
C) The owner of a call is entitled to the dividends paid on the underlying shares of stock.
D) Option holders can profit on movements of the price of the underlying security.

Accepted Answer

Option holders can profit on movements of the price of the underlying security. Option contracts give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, within a specified time frame. As the price of the underlying asset moves in the direction favored by the option holder, the value of the option increases, allowing the holder to make a profit by either selling the option or exercising it. A) is incorrect because the number of shares covered by an option can vary depending on the contract specifications. B) is incorrect because a put gives the holder the right to sell, not buy, a stated amount of securities. C) is incorrect because the owner of a call is not entitled to dividends, but rather may choose to exercise the option to buy the underlying shares and receive dividends as a shareholder.

Question 2

Warrants
A) provide substantially less capital appreciation potential than the underlying stock.
B) tend to be quite costly.
C) have a stipulated price and an expiration date.
D) are not traded in the secondary markets because of their low unit costs.

Accepted Answer

Warrants have a stipulated price and an expiration date, which distinguishes them from ordinary stock options. This means they are only valid for a certain period of time and at a certain price, making them different from regular stocks. A and B are incorrect because warrants can potentially provide capital appreciation and their cost can vary widely. D is also incorrect because warrants can be traded in secondary markets.

Question 3

LEAPS are a special type of option
A) that must be exercised within six months.
B) that can only be exercised on the expiration date.
C) that cannot be exercised for at least a year after it is is purchased.
D) that may have an expiration date as long as three years.

Accepted Answer

LEAPS (Long-term Equity Anticipation Securities) are a special type of options that have an expiration date that is typically one to three years in the future. This allows the owner of a LEAP to have more time for their underlying stock to make a significant move in price, without the pressure of a shorter expiration date. Hence, option D which states that LEAPS may have an expiration date as long as three years is the correct choice.

Question 4

American style options can only be exercised on their expiration dates.

Accepted Answer

American style options can be exercised at any time before their expiration date, while European style options can only be exercised on their expiration date.

Question 5

Warrants are generally created when
A) a firm decides to execute a stock split.
B) the issuing corporation decides to sweeten a bond issue.
C) a LEAP expires and automatically converts.
D) a financial institution decides to create them based on market conditions.

Accepted Answer

The answer of Warrants are generally created when
A) a firm...

Question 6

Options are created by investors.

Accepted Answer

Options are created by investors who purchase them from options exchanges or other investors who previously owned them.

Question 7

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as
A) leverage.
B) straddling.
C) hedging.
D) triple witching.

Accepted Answer

Leverage is the use of borrowed money or other financial instruments to increase the potential return of an investment. It allows investors to control a larger amount of assets with a smaller amount of capital, potentially magnifying both gains and losses. Straddling refers to a trading strategy that involves buying both a call option and a put option on the same underlying asset, while hedging is an investment technique used to reduce the risk of adverse price movements in an asset or portfolio by taking offsetting positions. Triple witching refers to the expiration of three types of futures and options contracts on the same day, which can lead to increased volatility in the markets.

Question 8

Rights are long-term call options attached to bonds while warrants are short-term call options attached to stock.

Accepted Answer

Rights are typically short-term options issued to existing shareholders to purchase additional stock, while warrants are long-term options often attached to bonds or preferred stock, allowing the holder to buy the company's stock at a specific price.

Question 9

Rights are call options issued to current owners of the stock and normally expire within a short period of time.

Accepted Answer

Rights are indeed call options issued to current owners of the stock, but they can have varying expiration dates, ranging from a few days to a few weeks.

Question 10

Puts and calls are issued by the same corporation that issued the underlying stock.

Accepted Answer

Puts and calls are options that give the holder the right, but not the obligation, to buy (call) or sell (put) a stock at a certain price (strike price) by a certain date (expiration date). These options are typically traded on options exchanges and are issued by third-party market makers. The underlying stock is issued by the corporation, but the options themselves are not.

Question 11

Which of the following is true about rights?
A) They are usually attached to bonds as a "sweetener"
B) The owner has several years in which to exercise the option.
C) They are a type of short-lived call option.
D) They are a type of short-lived put option.

Accepted Answer

Rights are indeed a type of short-lived call option, giving the holder the right but not the obligation to purchase shares of a company at a specified price before the rights expire, typically within a few weeks or months.

Question 12

One reason that writing options can be a viable and profitable investment strategy is that
A) the option writer collects the quarterly dividends.
B) most options expire unexercised.
C) an option writer determines when the option is exercised.
D) an option writer can exercise the option to avoid a potential loss.

Accepted Answer

Most options expire unexercised, which means that the option writer can keep the premium collected from selling the option without having to deliver the underlying asset or stock. This can result in a profitable investment strategy. The other options listed (A, C and D) do not accurately describe the benefits of writing options.

Question 13

Purchasers of stock options
A) own a financial asset with benefits of firm ownership.
B) have a claim on the profits of the firm issuing the underlying securities.
C) have the obligation to buy or sell a predetermined amount of shares at the strike price.
D) have the right to buy or sell a certain number of underlying shares.

Accepted Answer

Purchasers of stock options have the right, but not the obligation, to buy or sell a certain number of underlying shares at a predetermined strike price. They do not own a financial asset with benefits of firm ownership, nor do they have a claim on the profits of the firm issuing the underlying securities. The obligation to buy or sell shares would fall on the seller of the option.

Question 14

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.

Accepted Answer

Puts and calls are types of options contracts which derive their value from the behavior of an underlying asset such as a stock, commodity, or currency. Since their value is derived from another security, they are known as derivative securities.

Question 15

The maker of a put or call is the
A) company which issued the underlying security.
B) person who facilitates the trade on the floor of the exchange.
C) party who writes the option.
D) party who decides whether or not the option is exercised.

Accepted Answer

The party who writes the option (also known as the option writer or option seller) is the person or entity who makes the put or call. They receive a premium for selling the option and are obligated to fulfill the terms of the contract if the option is exercised.

Question 16

Warrants are short-term options usually expiring within a year or less.

Accepted Answer

Warrants are typically long-term instruments that can last for several years before they expire, unlike standard options which usually have shorter expiration periods.

Question 17

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

Accepted Answer

Investors who purchase options do not acquire ownership of the underlying security, but only the right to buy or sell it at a certain price or before a certain date.

Question 18

Warrants are options that are attached to bond issues to make the bonds more attractive to investors.

Accepted Answer

This statement is true. Warrants are often attached to bond issues to give investors the option to purchase additional shares or securities at a fixed price. This can increase the potential returns for investors and make the bonds more appealing.

Question 19

Which of the following statements concerning options are correct?
I.Options are derivative securities.
II.The value of an option is dependent upon the value of the underlying security.
III.The seller of the option retains the option premium whether or not the option is exercised.
IV.Options can provide leverage benefits.
A) II and III only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV

Accepted Answer

The answer of Which of the following statements concerning options...

Question 20

Many options expire without being exercised.

Accepted Answer

This is because options give the holder the right, but not the obligation, to buy or sell the underlying asset at a predetermined price, and many times the market conditions do not favor exercising the option.

Quiz 14: Options: Puts and Calls

Which one of the following statements concerning options is correct?

Warrants

LEAPS are a special type of option

American style options can only be exercised on their expiration dates.

Warrants are generally created when

Options are created by investors.

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as

Rights are long-term call options attached to bonds while warrants are short-term call options attached to stock.

Rights are call options issued to current owners of the stock and normally expire within a short period of time.

Puts and calls are issued by the same corporation that issued the underlying stock.

Which of the following is true about rights?

One reason that writing options can be a viable and profitable investment strategy is that

Purchasers of stock options

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.

The maker of a put or call is the

Warrants are short-term options usually expiring within a year or less.

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

Warrants are options that are attached to bond issues to make the bonds more attractive to investors.

Many options expire without being exercised.