Question 1

Exchange-traded stock options expire on the ________ of the expiration month.

Accepted Answer

Exchange-traded stock options expire on the third Friday of the expiration month.

Question 2

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is ________.

Accepted Answer

A call option is in the money when the stock price is above the exercise price. In this case, the stock price is $32, which is higher than the exercise price of $30, so the call option is in the money.

Question 3

The writer of a put option ________.

Accepted Answer

The writer (seller) of a put option is obligated to buy the underlying shares from the option holder at the strike price if the option holder decides to exercise the option.

Question 4

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a ________.

Accepted Answer

A long straddle involves buying both a call and put option with the same exercise price and expiration date. This strategy is used when the investor anticipates a significant price movement in either direction but is uncertain which way the price will move. By owning both options, the investor profits from any significant increase or decrease in the price of the underlying asset. Time spread, short straddle, and money spread are not appropriate terms to describe this strategy.

Question 5

The maximum loss a buyer of a stock call option can suffer is the ________.

Accepted Answer

The maximum loss a buyer of a stock call option can suffer is the call premium, which is the amount paid to purchase the option. If the option expires worthless, the buyer loses only the premium paid.

Question 6

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Accepted Answer

This strategy is called a time spread or calendar spread, where the investor benefits from the difference in time decay between the two options. By buying the September option and writing the October option, the investor is betting that the stock price will not move significantly in the short term but will increase over time. This allows the investor to profit from the September option while still holding on to the stock if the October option is exercised.

Question 7

A European call option gives the buyer the right to ________.

Accepted Answer

A European call option gives the buyer the right to buy the underlying asset at the exercise price only at the expiration date, unlike American options which can be exercised at any time before expiration.

Question 8

Which one of the statements about margin requirements on option positions is not correct?

Accepted Answer

The answer of Which one of the statements about margin...

Question 9

The Option Clearing Corporation is owned by ________.

Accepted Answer

The Option Clearing Corporation (OCC) is owned by the exchanges on which stock options are traded, such as the Chicago Board Options Exchange (CBOE) and the New York Stock Exchange (NYSE). These exchanges are the OCC's shareholders and they appoint the OCC's Board of Directors.

Question 10

Exercise prices for listed stock options usually occur in increments of ________ and bracket the current stock price.

Accepted Answer

Exercise prices for listed stock options usually occur in increments of $5 and bracket the current stock price.

Question 11

Each listed stock option contract gives the holder the right to buy or sell ________ shares of stock.

Accepted Answer

The standard option contract in the US represents the right to buy or sell 100 shares of the underlying stock. So, the correct answer is C - each listed stock option contract gives the holder the right to buy or sell 100 shares of stock.

Question 12

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a ________.

Accepted Answer

The strategy of investing in a stock and purchasing a put option is called a protective put. This strategy involves buying shares in a company to generate potential gains while also buying a put option to limit potential losses. The put option acts as a form of insurance against potential declines in the stock's price. This strategy is also known as a married put. The other options listed are different options strategies.

Question 13

The value of a listed put option on a stock is lower when:
I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

Accepted Answer

The answer of The value of a listed put option...

Question 14

An American call option gives the buyer the right to ________.

Accepted Answer

An American call option gives the buyer the right to buy the underlying asset at the exercise price on or before the expiration date. This means that the option holder can exercise the option at any time before the expiration date and buy the underlying asset at the exercise price.

Question 15

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ________.

Accepted Answer

A put option is considered "in the money" when the exercise price is above the current stock price, allowing the holder to sell the stock at a price higher than the current market price. Since the exercise price ($45) is above the current stock price ($41), the put option is in the money.

Question 16

In 1973, trading of standardized options on a national exchange started on the ________.

Accepted Answer

The Chicago Board Options Exchange (CBOE) began trading standardized options in 1973, making it the first national exchange to offer this type of financial instrument. The American Stock Exchange (AMEX) and New York Stock Exchange (NYSE) also began trading options in the following years, but the CBOE was the first. The Commodity Futures Trading Commission (CFTC) is a regulatory body and does not operate a national exchange for options trading.

Question 17

The value of a listed call option on a stock is lower when:
I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

Accepted Answer

I. A higher exercise price makes it less likely that the option will be in the money, thus decreasing its value.II. As the contract approaches maturity, there's less time for the stock to move into a favorable position, decreasing the option's value.III. If the stock decreases in value, a call option (right to buy at a set price) becomes less valuable if the stock is below the exercise price.

Question 18

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

Accepted Answer

This strategy is called a "money spread" or more commonly known as a "vertical spread." It involves buying and writing call options on the same underlying asset with the same expiration date but different strike prices.

Question 19

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a ________.

Accepted Answer

Writing a call option while holding the underlying stock is known as a covered call. A long straddle involves buying a put and call option at the same strike price and expiration date, while a naked call involves writing a call option without holding the underlying stock. A money spread is a term that is not commonly used in finance.

Question 20

Advantages of exchange-traded options over OTC options include all but which one of the following?

Accepted Answer

Exchange-traded options typically have standardized contracts, which may be less tailored to the specific needs of the market participants compared to OTC options. However, exchange-traded options provide several advantages over OTC options, including ease and low cost of trading, anonymity of participants, and no concerns about counterparty credit risk.

Quiz 15: Options Markets