Chapter 10 Custom Exam
What is the market outlook for the buyers of put options? A) Bullish B) Bearish C) Neutral D) Volatility
B) Bearish Writers (sellers) of call options are bearish (i.e., they want the value of the underlying stock to fall.
What is the market outlook for the buyers of call options? A) Bearish B) Bullish C) Volatility D) Neutral
B) Bullish Buyers of call options are bullish (i.e., they want the value of the underlying stock to rise).
Which of the following is the best hedge for a long stock position?: A) Buying a call B) Buying a put C) Selling a call D) Selling a put
B) Buying a put To hedge (protect) a long stock position, an investor should buy a put. If the value of the stock position declines, the put could be exercised which allows the investor to sell the stock at the option's strike price.
Which term is used to describe the price at which a call owner can buy a stock? A) Sales price B) Exercise price C) Premium D) Net price
B) Exercise price For a call option, the exercise or strike price is the price per share at which a buyer of the contract can purchase the underlying stock. The option's premium represents the price paid to acquire the option contract.
A covered call writer can be described as being: A) Short the call, and short the stock B) Short the call, and long the stock C) Long the call, and short the stock D) Long the call, and long the stock
B) Short the call, and long the stock When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.
f an equity option is exercised, when does the stock transaction settle? A) T + 1 B) T + 2 C) At expiration D) T + 4
B) T + 2 If equity option are exercised, the stock transactions typically settle on the second business day (T + 2).
Which of the following statements is TRUE regarding the purchaser of a call option? A) The purchaser has an obligation to sell stock if exercised B) The purchaser limits the amount of money he could lose if the underlying stock declines C) The purchaser benefits if the underlying stock declines D) The only way to profit is to exercise the option
B) The purchaser limits the amount of money he could lose if the underlying stock declines The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value, and exercises the call only if the stock is above the strike price. The investor can profit by either exercising or liquidating the call. A purchaser of a call option has the right to buy stock, not an obligation to sell stock.
Which of the following is TRUE for the buyers of put options? A) They have the right to buy 100 shares of stock. B) They have the right to sell 100 shares of stock. C) They have the obligation to buy 100 shares of stock. D) They have the obligation to sell 100 shares of stock.
B) They have the right to sell 100 shares of stock. Buyers of put options have the right to sell 100 shares of stock at the strike price.
An investor bought 5 ATT June 30 puts. These options will have intrinsic value when the market price of ATT is: A) $25 B) $30 C) $35 D) $40
A) $25 A put will have intrinsic value (also known as being in-the-money) when the market price of the underlying security is less than the strike price. Of the choices given, the only one which is lower than the exercise price is $25.
When a firm's customer exercises a call option, the firm will submit an exercise notice to the Options Clearing Corporation. The Options Clearing Corporation, in turn, will select a firm to receive the exercise notice based on: A) A random selection basis B) A first-in, first-out (FIFO) basis C) The largest short position D) Any method that is fair and equitable
A) A random selection basis The Options Clearing Corporation selects a member firm on a random selection basis only. Member firms can select customers with open short positions on a first-in, first-out basis, a random selection basis, or any method that is fair and equitable.
What is the market outlook for the sellers of put options? A) Bullish B) Bearish C) Neutral D) Volatility
A) Bullish Writers (sellers) of put options are bullish (i.e., they want the value of the underlying stock to rise.
An individual who is short stock and wants protection against an upside move in the market will probably: A) Buy a call option B) Sell a put option C) Buy a put option D) Buy a defense stock
A) Buy a call option An individual who is short stock will buy a call option. If the market advances, the individual will exercise the call option to limit the loss if the market value of the short stock increases.
A stock index call option is exercised. The writer must: A) Deliver cash B) Deliver the underlying index C) Purchase the underlying index D) Close out his position
A) Deliver cash When an index option is exercised, the writer must pay the buyer the in-the-money amount of the option in cash.
Which of the following derivatives are issued and guaranteed by the OCC? A) Options B) Warrants C) Rights D) Convertible preferred stock
A) Options Options are issued and guaranteed by the Options Clearing Corporation (OCC) and not by the issuer of the underlying securities. The other products are created by the issuing entity.
When do options trades settle? A) T + 1 B) T + 2 C) T + 4 D) At expiration
A) T + 1 Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).
Which of the following statements is TRUE in relation to the buyer of a call option? A) The investor has limited risk B) The investor has a limited potential profit C) The investor is entitled to all dividends paid on the underlying stock D) The investor must exercise the option if the underlying stock goes up
A) The investor has limited risk A purchaser of a call option would have limited risk with the potential for unlimited profit. The risk is the possibility of losing the entire premium (cost of the option). The owner of the call option is not an equity owner of the stock unless and until the option is exercised.
Which of the following is TRUE for the buyers of call options? A) They have the right to buy 100 shares of stock. B) They have the right to sell 100 shares of stock. C) They have the obligation to buy 100 shares of stock. D) They have the obligation to sell 100 shares of stock.
A) They have the right to buy 100 shares of stock. Buyers of call options have the right to purchase 100 shares of stock at the strike price.
A customer buys an IBM call option and pays a 2.50 point premium. The aggregate dollar amount paid is: A) $2.50 B) $25.00 C) $250.00 D) $2,500.00
C) $250.00 Each option contract is based on 100 shares of common stock. The dollar amount paid is $250 ($2.50 x 100 shares).
What is the maximum loss for an individual who purchases an option? A) The strike price times 100. B) The difference between the market price of the underlying security and the strike price. C) 100% of the premium. D) An unlimited amoun
C) 100% of the premium. When an option is purchased, the investor pays 100% of the premium. If the option expires, the investor will experience the maximum loss of the premium paid. (17547)
A firm is not permitted to accept an exercise notice from a customer for a listed equity option after: A) 2:30 p.m. Eastern Time on the expiration date of the option B) 3:30 p.m. Eastern Time on the expiration date of the option C) 4:30 p.m. Eastern Time on the expiration date of the option D) 5:30 p.m. Eastern Time on the expiration date of the option
D) 5:30 p.m. Eastern Time on the expiration date of the option According to SRO rules a firm is permitted to accept from a customer, an exercise notice for a listed equity option no later than 5:30 p.m. Eastern Time on the expiration date of the option (the third Friday of the expiration month). Brokerage firms, however, may set an earlier deadline for notification of an option holder's intention to exercise.
Which of the following statements is TRUE regarding stock index options? A) The index is affected if a stock in the index should split B) All index options use the European style of exercise C) The shortest initial expiration is three months D) An exercise is settled by cash instead of the delivery of securities
D) An exercise is settled by cash instead of the delivery of securities The exercise of a stock index option is settled by cash instead of the delivery of securities. An index will not be affected if one of its components should split. Some index options are American style (may be exercised any day up to expiration), while others use the European style (may only be exercised on the last trading day prior to expiration). Stock index options have a monthly expiration cycle.
What strategy is the portfolio manager of a mutual fund employing when call options are being sold on stock that's held in the portfolio? A) A bearish strategy that profits from falling prices. B)A bullish strategy that profits from rising prices. C) A neutral strategy that's considered a conservative means of generating income when prices are stable. D) An aggressive strategy that's considered a speculative means of generating income when prices are volatile.
C) A neutral strategy that's considered a conservative means of generating income when prices are stable. When a call option is written (sold) against a position in a portfolio, it's referred to as a covered call. The strategy is neither bullish nor bearish; instead, it's a conservative and neutral strategy that's designed to generate income from the receipt of the premium. The writer of the option doesn't believe the value of the underlying stock will rise or fall significantly. (17549)
An investor sold 5 JOJO April 70 calls for a premium of 6 points each. If the market price of JOJO is $74 these options have: A) An intrinsic value of 0 and a time value of 6 B) An intrinsic value of 2 and a time value of 4 C) An intrinsic value of 4 and a time value of 2 D) An intrinsic value of 6 and a time value of 0
C) An intrinsic value of 4 and a time value of 2 A call will have intrinsic value, also known as being in-the-money, when the market price of the underlying security is higher than the strike price. Since the underlying stock is $74 and the strike price is 70, the option's intrinsic value is 4. The remainder of the 6-point premium, 2, is time value.
Using options to limit losses on other investments is referred to as: A) Speculation B) Neutralization C) Hedging D) Volatility minimization
C) Hedging Hedging refers to using options as a means of limiting losses on existing long or short stock positions. To hedge an existing position, an investor could buy an option contract.
The current market value of a stock is below the strike price of a call option. This situation is referred to as: A) At-the-money B) In-the-money C) Out-of-the-money D) Behind-the-money
C) Out-of-the-money Call options are in-the-money when the current market value of the underlying stock is above the option's strike price. However, if the stock's market price is below the strike price of a call, the option is out-of-the-money. Out-of-the-money and at-the-money options have no intrinsic value.
All of the following are fixed by the exchange on which an option contract trades, EXCEPT the: A) Strike price B) Expiration date C) Premium D) Contract size
C) Premium The premium for an option is not fixed by the exchange on which the option trades. The premium is determined by supply and demand on the floor of the exchange.
Which of the following option positions obligates the investor to sell shares if exercised? A) Long a call B) Long a put C) Short a call D) Short a put
C) Short a call A short call position obligates the investor to sell shares if the option is exercised.
Which of the following is TRUE for the writers (sellers) of put options? A) They have the right to buy 100 shares of stock. B) They have the right to sell 100 shares of stock. C) They have the obligation to buy 100 shares of stock. D) They have the obligation to sell 100 shares of stock.
C) They have the obligation to buy 100 shares of stock. Writers (sellers) of put options have the obligation to purchase 100 shares of stock at the strike price if exercised against.
An index option has been exercised. What is the writer of the option required to do to satisfy his obligation? A) Buy all of the shares in the index. B) Deliver all of the shares in the index. C) Deposit cash equal to the strike price. D) Deposit cash equal to the difference in the strike price and the value of the index.
D) Deposit cash equal to the difference in the strike price and the value of the index. Index options are cash settled, which means that they never require delivery of securities at exercise. If an index option is exercised, the amount of money by which the option is in-the-money must be delivered by the writer. Index call options are in-the-money (have intrinsic value) when the index value is above the strike price. Index put options are in-the-money when the index value is below the strike price.
In which of the following types of accounts can an uncovered call writing strategy be executed? A) Cash B) IRA C) Custodial D) Margin
D) Margin Uncovered calls can only be written in a margin account. Retirement accounts, custodial accounts, and cash accounts cannot utilize the uncovered call writing strategy.
When an option contract is exercised, the writer: A) Will establish a capital loss B) May close out the position upon receipt of the assignment notice C) May retransmit the assignment notice D) Must fulfill the obligation to buy or sell the underlying instrument
D) Must fulfill the obligation to buy or sell the underlying instrument The writer (short the contract) must fulfill the obligation to deliver the underlying instrument for the exercise of a call or cash for the exercise of a put.
An investor has written 3 XYZ May 40 calls. Which of the following is correct? A) She may purchase 100 shares. B) She must deliver 40 shares of XYZ stock if exercised against. C) She must deliver 120 shares of XYZ stock if exercised against. D) She must deliver 300 shares if exercised against.
D) She must deliver 300 shares if exercised against. If exercised against, a call writer is obligated to deliver 100 shares per contract. In this case, the investor wrote (sold) three contracts and is obligated to deliver 300 shares of XYZ stock at the strike price.
If an index option is exercised, what does the buyer of the contract receive? A) 100 shares of the index B) 500 shares of the index C) One share of each component of the index D) The cash differential between the option strike price and the index value
D) The cash differential between the option strike price and the index value When index options are exercised, they utilize cash settlement. Since there is no delivery of the underlying shares, the seller delivers to the owner the cash difference between the option's strike price and the index value.
Which of the following is TRUE for the writers (sellers) of call options? A) They have the right to buy 100 shares of stock. B) They have the right to sell 100 shares of stock. C) They have the obligation to buy 100 shares of stock. D) They have the obligation to sell 100 shares of stock.
D) They have the obligation to sell 100 shares of stock. Writers (sellers) call options have the obligation to sell 100 shares of stock at the strike price if exercised against.
An investor writes an uncovered RST May 25 put for a premium of 4. At what market price will the investor break even?
The writer calculates his breakeven point by deducting the $4 premium from the $25 exercise price. The writer will, therefore, break even at $21.
