options quiz
Which of the following create a straddle? I Long 1 ABC Jan 50 CallLong 1 ABC Apr 50 Put II Short 1 ABC Jan 50 CallShort 1 ABC Jan 50 Put III Short 1 ABC Jan 50 CallLong 1 ABC Jan 50 Put IV Short 1 ABC Jan 50 CallShort 1 ABC Jan 60 Put A II only B I and III C II and IV D III and IV
The best answer is A. A straddle is the purchase of a call and a put; or the sale of a call and a put; on the same underlying security with the same strike price and expiration.
Which of the following index options would be considered "broad based"? A Standard and Poor's 100 Index B High Technology Index C Japan Index D Oil and Gas Index
The best answer is A. For an index option to be considered to be "Broad Based," it must have companies in the index covering a broad spectrum of industries. Examples of narrow indexes are oil and gas; gold and silver; high technology; and airline stock indexes. Also narrow indexes could be based on stocks of companies in the same geographic location.
A customer would buy put contracts because the customer: A is bullish on the underlying security B is bearish on the underlying security C is neutral on the underlying security D wishes to generate ordinary income
The best answer is B. Put contracts are purchased when a customer is bearish on the market. If the market falls, the puts go "in the money" and the holder would exercise, selling the stock for the strike price that is higher than the current market price. The maximum potential gain for the holder of a put will occur if the price falls to "0." Because the holder of a put pays a premium and does not earn this premium, this is not an income strategy, making Choice D incorrect.
A customer sells 1 ABC Feb 40 Call @ $7 when the market price of ABC is $39. The stock moves to $50 and the customer is assigned. The stock is bought in the market for delivery. The gain or loss to the writer is: A $300 gain B $300 loss C $700 loss D $1,100 loss
The best answer is B. The writer of the call, when exercised, is obligated to deliver stock at $40 per share. He must buy the stock at $50 in the market losing 10 points. Since $700 (7 points) was collected in premiums, the net loss is 3 points or $300.
A customer is long 100 shares of ABC stock, believes that the market will remain flat for the next 6 months. To maximize income from the position, which strategy is best? A covered call write B ratio call write C short call spread D short against the box
The best answer is B. To get income from a long stock position, the customer would sell a call to collect the premium. If the customer is certain that the market will not move, even greater income can be generated by "ratio writing" - that is, selling more call contracts (collecting more premiums) than shares owned. However, for the extra income received also comes extra risk if the market should rise.
Covered call writing is an appropriate strategy in a: A declining market B rising market C stable market D fluctuating market
The best answer is C. A covered call writer owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be "called away" in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.
A customer who purchases a "call spread" believes that the market will: A rise B fall C remain neutral D be volatile
The best answer is A. A purchase of a "call spread" is similar to simply buying a call. The difference is that a long call gives unlimited upside gain potential; a long call spread gives limited upside gain potential (for a lower premium paid).
Which TWO of the following choices are "combinations"? I Long 1 ABC Jan 50 Call; Long 1 ABC Apr 60 Put II Long 1 ABC Jan 60 Call; Short 1 ABC Jan 50 Call III Short 1 ABC Jan 50 Call; Short 1 ABC Jan 60 Put IV Short 1 ABC Jan 60 Call; Long 1 ABC Jan 50 Put A I and III B III and IV C I and IV D II and III
The best answer is A. A "straddle" is the purchase of a call and put; or the sale of a call and put; with the same strike prices and expirations. A "combination" is the same as a straddle, except that the strike prices and/or expirations are different.
Which of the following are "classes" of options? I ABC Calls II ABC Puts III ABC Jan 50 Calls IV ABC Jan 50 Puts A I and II B I and III C II and III D III and IV
The best answer is A. A class of option consists of all options of one type on an underlying security. For example, all ABC calls are a "class;" all ABC puts are a "class." In contrast, an options "series" would be all ABC Jan 50 Calls - a series is a class of option on the same underlying stock with the same strike and expiration.
In October, a customer sells 1 ABC Jan 70 Call @ $4 when the market price of ABC is $71. The market price moves to $74 and the customer closes out the position just prior to expiration at intrinsic value. The gain or loss is? A no gain or loss B $400 gain C $400 loss D $800 loss
The best answer is A. The customer's contracts are not exercised. The customer initially sells the call at $4. Since he or she receives the $4, this is a credit. To close the position, the customer must buy back the option (opening sale is closed with a closing purchase). He or she buys back the position at "intrinsic value" - if the strike price of the call is $70 and the market price of the stock of $74, the call has "intrinsic value" of 4 points. If the call is purchased in a closing trade at $4, there is no gain or loss since the position was opened at a premium of $4.
A customer buys 1 ABC Feb 45 Call @ $3 when the market price of ABC is 44. The stock moves to $35 and stays there until the contract expires. The gain or loss to the customer is: A $300 loss B $300 gain C $700 loss D $700 gain
The best answer is A. The holder has bought the right to buy the stock at $45 per share. She bought this right at $3 per share. Unfortunately, the market price falls to 35 and the contract will expire "out the money." The holder just loses the premium paid for the contract.
If an investor has a gain on a short stock position, which of the following can be used to protect this gain? I Buy a call II Sell a put III Buy a put IV Place a buy stop order A I, II, IV B I, III, IV C II, III, IV D I, II, III, IV
The best answer is A. The investor has a gain on the short stock position that will evaporate as the market rises. To protect the gain, the stock must be bought in if the market begins to rise. A buy stop order is executed in a rising market, and would be appropriate to close the short position if the market rises. The purchase of a call allows the stock to be bought in at the strike price if the market rises, protecting the gain. If a put is sold and the market rises, the put will expire worthless, and the writer will keep the premium received. This amount of premium received will reduce any loss on the short stock position if the market rises. The purchase of a put will not protect the gain, since it allows the stock to be sold at the strike price. If exercised, the long put will cause the customer to have sold the stock TWICE.
The purchase of a put has all of the same characteristics as selling stock short EXCEPT: A unlimited loss potential in a rising market B limited gain potential in a falling market C low liquidity risk if the position is to be liquidated D both are bear market strategies
The best answer is A. The purchase of a put has limited loss potential in a rising market - the maximum that can be lost is the premium paid. In a rising market, the loss potential on a short sale of stock is unlimited, since the stock must be purchased at the higher market price and replaced. The maximum gain for both a long put and a short sale of stock occurs if the market falls to "0." Both have increasing gain as the market falls, all the way to a maximum gain at "0." Because both are profitable in falling markets, they are bear market strategies. Thus, the maximum gain is limited for both, since the market can only fall as far as to "0.". Both options and stocks are actively traded on exchanges, so there is little liquidity risk for either.
A customer sells 1 ABC Jul 30 Call @ $1 and sells 1 ABC Jul 30 Put @ $3.50 when the market price of ABC is $29. The breakeven points are: A $26.50 and $31.00 B $25.50 and $34.50 C $27.50 and $33.50 D $29.00 and $35.00
The best answer is B. A short straddle is the sale of a call and a put on the same stock, with the same strike price and expiration. To breakeven, the writer must lose the 4.50 point credit received for selling the straddle. If the market rises, the call side will be exercised at a loss to the writer. The call breakeven is $30 + $4.50 = $34.50. If the market falls, the put side will be exercised at a loss to the writer. The put breakeven is $30 - $4.50 = $25.50. To summarize, the breakeven formulas for a short straddle are: upside breakdown = call strike price + combined premium Downside breakdown = Put strike price - combined premium
A conservative customer wishes to use an options strategy to generate income against his entire equity portfolio, which consists mainly of a diversified mix of blue chip stocks. To do so, the customer could: A buy OEX Puts B sell OEX 100 Calls C buy VIX Puts D sell VIX Calls
The best answer is B. For income, the customer must sell options, so Choices A and C are out. If the customer sells S&P 100 Index (OEX) Calls, the customer will earn premium income if the market stays flat or declines. The premium earned will help offset any loss on the stock portfolio. If the market rises, the calls will be exercised, but the loss on the exercise of the calls should be offset by the increase in the value of the stock portfolio. Thus, this is a conservative income strategy. The VIX option value is not based on stock price movements - rather it is based on price volatility. It is negatively correlated to the market. If the market declines, volatility increases and the VIX increases in value. The VIX calls would be exercised. The customer would lose on both the short VIX option positions and the equity portfolio. So this strategy has greater risk potential in a down market than selling S&P 100 index calls. On the other hand, in a rising market, volatility decreases. The short VIX option will lose value and will likely expire. The customer will keep the premium and will enjoy the rise in value of the equity portfolio as well. So for the greater risk assumed in a down market, the investor has greater gain potential in an up market. Since this investor is "conservative" and is seeking income, the sale of the OEX Calls is the better choice since it is lower risk.
A customer sells short 100 shares of ABC stock at $40 and buys 1 ABC Mar 40 Call @ $5. The maximum potential gain is: A $500 B $3,500 C $4,500 D unlimited
The best answer is B. If the stock falls, the customer gains on the short stock position. The customer sold the stock for $40. If it falls to "0," the customer can buy the shares for "nothing" to replace the borrowed shares sold and make 40 points. The customer lets the call expire "out the money" losing 5 points, so the maximum potential gain is 35 points = $3,500.
The writer of a call on a listed stock is exercised. The writer must: I deliver stock II deliver cash III take delivery of stock IV take delivery of cash A I and III B I and IV C II and III D II and IV
The best answer is B. If the writer of a call option on listed stocks is exercised, he or she must deliver 100 shares of stock, for which the writer will receive the strike price in cash.
If market sentiment is expected to be volatile over the upcoming 6 months, the best strategy would be to: A Buy OEX Puts B Buy VIX Straddles C Sell SPX Straddles D Sell OEX Call Spreads
The best answer is B. The "VIX" option is based on the S&P Volatility Index. This is a benchmark index that gauges investor sentiment - commonly referred to as a "fear gauge." The index is derived from real-time S&P 500 Index option (SPX) bid and ask quotes. It reflects investors' consensus view of expected stock price volatility over the upcoming 30 days. So if an investor expects market volatility over the next 6 months, this would be a good option contract to use. A long VIX straddle is the purchase of a call and the purchase of a put on the VIX with the same strike price and expiration, which would be profitable if the VIX either rises or falls - so this is the best choice.
A customer buys an ABC Jul 50 Put and sells an ABC May 50 Put. The customer profits if: A the spread narrows B the spread widens C the market price moves up sharply D both contracts expire
The best answer is B. The July expiration must be longer than the May expiration. The maximum life of a regular option contract is 9 months. If it is now May, then the July contract can trade (since it is 2 months later than May). However, if it is July, a May contract cannot be trading, because the following May is 10 months away. Thus, the customer is buying the far expiration (more expensive) and selling the near expiration (less expensive since there is less time left to the contract), so this must be a debit calendar spread. Debit spreads are profitable if the spread between the premiums widens. If both contracts expire, the debit is lost. If both contracts are exercised, the customer buys the stock at 50 and sells it at 50, still losing the debit.
In November, a customer buys 1 ABC Jan 70 Call @ $4 when the market price of ABC is $71. If the customer closes out the position prior to expiration by selling the call at $3, the gain or loss is? A $100 gain B $100 loss C $300 gain D $400 gain
The best answer is B. The customer bought the call (opening purchase) for a $4 premium and then closed with a sale of the contract at $3 for a $100 loss.
A customer buys 100 shares of ABC stock at $38 per share and sells 1 ABC Jul 40 Call @ $6 on the same day in a cash account. The stock rises to $45 and the customer closes out the call @ $10 and sells the stock in the market. The gain or loss is: A $100 gain B $300 gain C $300 loss D $700 gain
The best answer is B. The customer bought the stock at $38 and sold it in the market at $45 for a 7 point gain. The customer sold the call contract at $6 and bought it back at $10 for a 4 point loss. The net gain is 3 points on 100 shares = $300.
A customer sells short 100 ABC at $43 and buys 1 ABC Jan 45 Call @ $5. ABC goes to $33 and the customer lets the call expire and closes out the stock position at the market. The customer has a: A $500 loss B $500 gain C $700 gain D $1,000 gain
The best answer is B. The customer has sold short shares of stock at $43 thinking that the market is going to go down. To protect his stock position from going up, the customer buys a call as well (which allows him to buy the stock at the strike price, if needed, in a rising market). Here, the market does what the customer wants it to do and goes down. As the market goes down, the call contract will expire "out the money." The stock that was sold for $43 can be purchased in the market for $33 and replaced, for a 10 point gain. However, since $5 was paid in premiums for the call, the net gain is $5 per share or $500.
A customer sells 1 ABC Jan 100 Call @ $8 and buys 1 ABC Jan 120 Call @ $3 when the market price of ABC is $105. The market price of ABC rises to $115 and the customer closes the 100 Call @ $19 and the 120 Call @ $6. The customer has a: A $800 profit B $800 loss C $1,300 profit D $2,000 profit
The best answer is B. The customer opened the spread with a $5 credit. The spread is profitable if it is closed at a smaller (or "narrower") debit. The positions are closed at a net debit of $13 (6 to sell the 120 call; 19 to buy back the 100 call). The net loss is: -$13 + $5 = -8 points or $800.
On the same day, a customer buys 100 shares of ABC at $40 and sells short 100 shares of XYZ at $50. The customer then buys 1 ABC Jan 40 Put @ $4 and 1 XYZ Jan 50 Call @ $5. The breakeven points are: A ABC: $36 / XYZ: $45 B ABC: $44 / XYZ: $45 C ABC: $36 / XYZ: $55 D ABC: $44 / XYZ: $55
The best answer is B. The customer paid $4 for the ABC put and $40 for ABC stock, for a total of $44. This is the breakeven on ABC stock. The customer sold XYZ stock short for $50, but paid $5 for the XYZ call, for a net receipt of $45. He or she must buy back XYZ at this price to break even. To summarize, the breakeven formulas for long stock / long put and short stock / long call positions are: long stock / Long Put Breakeven = Stock + Premium Short stock / Long call Breakeven = Stock - Premium
Which of the following cover the sale of 1 XYZ Jul 50 Call contract? I The deposit of 4 XYZ convertible bonds, each convertible into 25 shares of XYZ stock II The purchase of 1 XYZ Aug 50 call III The purchase of 1 XYZ Jun 50 call IV The deposit of $5,000 A I only B I and II C II and III D I, II, III, IV
The best answer is B. The deposit of the XYZ convertible bonds covers the sale of the XYZ Jul 50 Call because should the call be exercised, the bonds can be converted and the stock delivered. Similarly, the purchase of 1 XYZ Aug 50 Call covers the short call. If the short call is exercised, forcing delivery, the long call can be exercised into August to get the stock. The purchase of 1 XYZ Jun 50 Call does not cover the sale of the Jul 50 Call. Assume, for example, that in July, the short call is exercised. The long call expired in June, so you must go to the market to get the stock. This position is not covered. The long call must have the same expiration or later to cover the short call. The deposit of cash will not cover the sale of a call since the potential loss is unlimited.
A customer buys 1 ABC Feb 60 Call @ $4 when the market price of ABC is 61. The stock moves to $75 and the customer exercises. The gain or loss to the customer is: A $400 gain B $1,100 gain C $1,500 gain D $6,400 gain
The best answer is B. The holder has bought the right to buy the stock at $60 per share. She bought this right at a premium of $4 per share. By exercising, the customer buys the stock at the strike price of $60 and then sells the stock at the prevailing market price of $75. $75 - $60 = $15 gain on the stock position, offset by the $4 premium, gives a profit of $11 per share, or $1,100 for the contract covering 100 shares.
A foreign currency trader has bought 1,000,000 Canadian Dollars in the spot market at 91. To hedge, the trader buys 100 PHLX Jul Canadian Dollar 92 Puts @ 1.50. The position will breakeven at which price? A .9050 B .9250 C .9350 D .9450
The best answer is B. The trader bought the Canadian Dollars at 91 and paid a premium of 1.50 for the put option, for a total cost of .9250. To breakeven, the Canadian Dollar must rise to this level.
Which of the following cover a short ABC put? I Long ABC stock position II Short ABC stock position III Cash equal to the aggregate exercise price A I only B II only C II and III D I, II, III
The best answer is C. A long stock position is not considered "cover" for a short put since as the market goes down, the short put is exercised and there is increasing loss on the stock position. The O.C.C. accepts as "cover" a long put with the same strike price or higher (thus creating a long put spread), a bank guarantee letter (where the bank assumes responsibility for loss), or an escrow receipt for cash sufficient to pay for the stock should the put be exercised. A short stock position also covers a short put, since the credit from the sale of the stock is available to "pay" for the purchase of the stock should the short put be exercised.
A customer would buy a straddle because the customer: A is only bullish on the underlying security B is only bearish on the underlying security C believes that the market for the stock may be either bullish or bearish D wishes to generate some additional income from the underlying security during a period of market stability
The best answer is C. A long straddle is the purchase of a call and the purchase of a put, on the same stock at the same strike price and expiration. If the market goes up, the long call goes "in the money" and the long put expires "out the money." There is potentially unlimited profit on the long call. Conversely, if the market falls, the long put goes "in the money" and the long call expires "out the money." The profit on the long put keeps increasing as the market falls, all the way to "0." Thus, the position is profitable if the market either rises or falls. If the market stays the same and does not move, then both positions expire "at the money" and the premium paid is lost.
ABC Jan 50 call contracts are trading in the market at .15. What is the dollar price that a customer would pay for 2 contracts at this price? A $1.50 B $15.00 C $30.00 D $300.00
The best answer is C. A premium of .15 is $.15 per share. Equity contracts cover 100 shares, so the total premium is $.15 x 100 = $15.00 per contract. Since there are two contracts, the total premium would be $30.
A customer who is short 1 ABC Jan 40 Call wishes to create a "short call spread." The second option position that the customer must take is: A long 1 ABC Jan 30 Call B long 1 ABC Jan 30 Put C long 1 ABC Jan 50 Call D long 1 ABC Jan 50 Put
The best answer is C. A spread is a buy and a sell of the same type of option with different strike prices and/or expirations. Since the customer is already short a call, he must be long a call to create a spread. In order for the position to be a "short call spread," the customer must be a net seller, meaning he must sell the more expensive contract and buy the less expensive one. Since the lower strike price contracts are worth more money (for calls, since the contract grants the holder the right to buy at the strike price, and lower is a better price at which to buy), the customer must buy the higher strike price contract to create a net credit position. This is a bearish strategy. In this example, if the customer sells the Jan 40 Call (higher premium) and buys the Jan 50 Call (lower premium), the customer creates a credit spread. If the market falls below $40, both positions expire "out the money" and the credit is the maximum profit. On the other hand, if the market rises above $50, both positions go "in the money" and are exercised. In this case, the customer must deliver stock at $40 that is purchased at $50 for a 10 point loss (net of any credit received). This is the maximum potential loss.
Which statements are TRUE about option contracts? I Calls go "out the money" when the market price rises above the strike price II Calls go "out the money" when the market price falls below the strike price III Puts go "out the money" when the market price rises above the strike price IV Puts go "out the money" when the market price falls below the strike price A I and III B I and IV C II and III D II and IV
The best answer is C. An "out the money" contract is one, that if exercised, would result in an unprofitable stock trade to the holder. These contracts are left to expire unexercised. Calls go "out the money" when the market price falls below the strike price. The call holder would not exercise and buy the stock at a strike price that is higher than the current market. Puts go "out the money" when the market price rises above the strike price. The put holder will not exercise and sell stock at the strike price that is lower than the current market price.
Which of the following investors are likely to trade foreign currency options? I U.S. Corporations with multinational operations II Foreign Corporations with multinational operations III Individuals with large foreign currency holdings IV Individuals with large U.S. dollar holdings A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is C. Any multinational corporation will trade foreign currencies, either to acquire currency for payment in a particular country or to hedge transactions against fluctuations in currency values. Similarly, individuals with large foreign currency holdings are likely to use the foreign currency markets to hedge their positions. Individuals with U.S. dollar holdings have no need for the foreign currency markets.
A customer buys 200 shares of ABC at $68 and sells 2 ABC 70 Calls @ $3. The market rises to $80 and the calls are exercised. The customer has a: A $300 gain B $600 gain C $1,000 gain D $2,000 gain
The best answer is C. If the calls are exercised, the stock (which cost $68 per share) must be sold at the $70 strike price for a $2 gain x 200 shares = $400. The customer also received $300 per contract for selling the calls, for a total of $600 in premiums received. Therefore, the total gain is $400 + $600 = $1,000.
A customer buys 1 ABC Oct 65 Put at $7 when the market price of ABC is 62. ABC stock rises to $70 and stays there through October. The customer: A breaks even B loses $200 C loses $700 D loses $1,200
The best answer is C. If the market rises to $70, the put expires "out the money" (since the strike price is $65). The customer loses the $700 premium paid.
All of the following exchanges trade listed stock options EXCEPT: A CBOE B AMEX C NASDAQ D PHLX
The best answer is C. Listed stock options are traded on the CBOE (Chicago Board Options Exchange); AMEX (American Stock Exchange); PHLX (Philadelphia Stock Exchange); and the PSE (Pacific Stock Exchange) - now owned by the NYSE and renamed the ARCA Exchange.. By far, the largest options market is the CBOE.
A customer buys 1 ABC Feb 40 Call @ $2 when the market price of ABC is $39.50. The customer's breakeven point is: A $37.50 B $38.00 C $41.50 D $42.00
The best answer is D. The holder of a call breaks even if the market price rises by enough to recover the premium paid. The holder paid $2 for the right to buy stock at $40. The effective cost if he exercises is $42. He must be able to sell the stock for $42 to breakeven. To summarize, the formula for breakeven on a long call is: Long call Breakeven = Strike + Premium
On the same day in a margin account, a customer buys 1 ABC Jan 35 Call @ $8 and sells 1 ABC Jan 50 Call @ $2 when the market price of ABC is $41. The position will be profitable if: I both contracts expire II both contracts are exercised III the spread between the premiums widens IV the spread between the premiums narrows A I and III B I and IV C II and III D II and IV
The best answer is C. Since this is a debit spread, if both positions are exercised, the customer gains the difference in the strike prices (buy at $35; sell at $50) minus the difference in premiums paid ($6 debit). If both positions expire, the customer loses the difference between the premiums ($6 debit). To be profitable, a debit spread must be closed out (traded) at a larger credit. Thus, the spread between the premiums must widen.
PHLX traded option contracts are available for which of the following currencies? I Euro II U.S. Dollar III Japanese Yen IV Canadian Dollar A II only B I and II C I, III, IV D I, II, III, IV
The best answer is C. The PHLX World Currency options are available on the 6 major foreign currencies - Euro, British Pound, Swiss Franc, Japanese Yen, Australian Dollar, and Canadian Dollar. Note that there is no trading of U.S. Dollar options in the U.S. markets because U.S. law prohibits speculation in its own currency.
A customer sells 1 ABC Jan 50 Call @ $3 when the market price of ABC is at $52. The maximum potential gain for the position is: A $100 B $200 C $300 D unlimited
The best answer is C. The maximum potential gain when selling a naked call option is the premium received. This occurs if the market drops and the call expires "out the money."
What position can an investor take to hedge a short stock position? A long put B short put C long call D short call
The best answer is C. When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the market rises, the loss potential is unlimited. The purchase of a call allows the stock to be bought in at a fixed price, limiting upside risk.
A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The customer will have a loss at which of the following market prices for PDQ? A $42 B $43 C $55 D $56
The best answer is D. A customer with a short stock / short put position loses if the market rises. The customer sold the stock at $49 and collected $6 in premiums, for a total of $55. To break even, the stock must be bought for this amount. If the stock is bought for more than $55, the customer loses. Therefore, a loss is experienced at $56. To summarize, the formula for breakeven for a short stock / short put position is: Short Stock/ Short put Breakeven =short Sale Price + Premium
Which of the following are standardized for listed option contracts? I Contract size II Expiration date III Strike price interval IV Expiration time A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is D. Exchange traded option contracts have standardized contract sizes (e.g., 100 shares of stock), standardized expiration date and time (11:59 PM Eastern Standard Time on the 3rd Friday of the month), and standardized strike price intervals (generally 5 point intervals). The premium or "price" of the option is determined minute by minute in the trading market.
In which of the following choices are both the stock and options positions on the same side of the market? I Long Call / Long Stock II Short Call / Long Stock III Long Put / Short Stock IV Short Put / Short Stock A I and II B III and IV C II and III D I and III
The best answer is D. Long calls are profitable in bull markets as are long stock positions. These are on the same side of the market (the upside). Short calls are profitable if the market drops, while long stock positions are profitable if the market rises - these are on opposite sides of the market. Long puts are profitable if the market drops and short stock positions are profitable if the market drops - these are on the same side of the market. Short puts are profitable if the market rises while short stock positions are profitable if the market falls - these are on opposite sides of the market.
A customer owns 100 shares of ABC stock in a margin account, valued at $40 per share. The customer sells 2 ABC Jul 40 Calls @ $4. The maximum potential loss is: A $800 B 3,200 C $4,000 D unlimited
The best answer is D. One of the short calls is covered by the long stock position, while the other short call is naked. The loss potential on a short naked call is unlimited.
An investor sells short 200 shares of ABC stock at $22 and sells 2 ABC Nov 20 Puts @ $1 on the same day in a margin account. The breakeven point is: A $19 B $21 C $22 D $23
The best answer is D. Since the customer received $1 per share in premiums, he or she can afford to lose $1 on the short stock position and still break even. The stock was sold short at $22. If the market rises to $23, the customer can buy back the stock and break even. Note that breakeven point is always computed on a per share basis; the fact that there are 2 contracts does not affect the computation. To summarize, the formula for breakeven for a short stock / short put position is: Short Stock/ Short put Breakeven =short Sale Price + Premium
A company which is included in the Standard and Poor's 100 Average (the OEX) splits its stock 2:1. This will result in: A the number of OEX contracts being adjusted upwards and the index value being adjusted downwards B the number of OEX contracts being adjusted downwards and the index value being adjusted upwards C no change in the number of contracts but a reduction in the index value D no change in either the number of contracts or the index value
The best answer is D. Stock indexes are not reduced for stock splits or stock dividends. Since the aggregate value of all of that company's shares is included in the index, a stock split or dividend has no effect. The number of shares increases, while the market price per share decreases, but the total value of the company included in the index remains the same.
Which of the following statements are TRUE regarding the premium of an option contract? I The lesser the volatility of the underlying security, the higher the premium II The greater the volatility of the underlying security, the higher the premium III The lower the market price of the stock, the higher the premium on a call contract IV The lower the market price of the stock, the higher the premium on a put contract A I and III B I and IV C II and III D II and IV
The best answer is D. The greater the volatility of the underlying security, the higher the premium; the higher the market price of the stock, the higher the premium on a call contract (since it goes further "in the money"). The lower the market price of the stock, the higher the premium on a put contract (since it goes further "in the money ").
A customer buys 5 ABC Jan 60 Calls @ $4 and buys 5 ABC Jan 60 Puts @ $1 on the same day when the market price of ABC stock is $62. The customer's maximum potential gain is: A $500 B $2,500 C $27,500 D unlimited
The best answer is D. The positions created by the customer are: Long 5 ABC Jan 60 Calls@ $4Long 5 ABC Jan 60 Puts@ $1 $5 debit x 5 contracts = $2,500 debit The customer created a long straddle, which is the purchase of a call and a put on the same stock, with the same strike price and expiration. If the market stays exactly at 60, both the calls and puts expire "at the money" and the customer loses $2,500. If the market rises, the calls go "in the money" and the puts expire. The customer has unlimited upside gain potential on the calls. Conversely, if the market drops, the puts go "in the money" and the calls expire. The maximum potential gain on the downside is the strike price of the put (60) less the debit of 5 = $55 per share x 500 shares = $27,500.
The sale of a call has all of the same characteristics as selling stock short EXCEPT: A unlimited loss potential in a rising market B limited gain potential in a falling market C low liquidity risk if the position is to be liquidated D no erosion of value as the position is held
The best answer is D. The sale of a call has unlimited loss potential, as does the short sale of stock. The maximum gain for a call writer is the premium collected; the maximum gain on a short stock position occurs if the market falls to "0" and the position can be closed for nothing - so gain potential is limited for both. Both options and stocks are actively traded on exchanges, so there is little liquidity risk for both. Options contracts lose time premium as the position nears expiration; this is not true for stock positions.
