Options Quiz
A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. In order to receive the dividend, the customer must exercise the put: A on the ex date B on the record date C before the ex date D before the record date
The best answer is A. Because exercise settlement of listed stock options occurs 2 business days after trade date, in order to retain the cash dividend, the holder of the shares cannot sell them before the ex date (which is 1 business day prior to record date). If the put is exercised on the ex date or later, the trade will settle after the record date, and the customer will be on record to receive the cash dividend. On the other hand, if the long put were exercised before the ex date, the trade would settle on the record date or before, and the customer would be selling the stock, taking him- or herself off the record book on the record date or before, so that client would not receive the dividend.
A customer has a large portfolio of diversified blue chip stocks and would like to increase the income from the investments. Which of the following strategies are suitable? A Covered call writing B Naked call writing C Covered put writing D Naked put writing
The best answer is A. Covered call writing is suitable for securities that are expected to remain relatively constant in price. If the price remains constant, the calls expire and the premium is earned, with no gain or loss on the stock position. Blue chip stocks are less volatile than lesser quality stocks and are good candidates for covered call writing strategies. If covered calls are sold against these stocks, there is no margin required on the sale of the call. Downside risk is limited to the loss of the investment net of premiums received. Naked call writing exposes the writer to unlimited risk and is not suitable. Put writing strategies are used to increase income against short stock positions.
A customer buys 100 shares of ABC at $50 and buys 1 ABC Jan 50 Put @ $5. This position results in a profit when the market: A rises above 55 B falls C is stable D rises above 50
The best answer is A. If the market falls, the customer will exercise the put which was purchased for a premium of $5. The customer bought the stock at $50 and bought the right to sell the shares at $50. The loss would be the $5 per share ($500 total) premium paid. If the market remains stable, the put expires "at the money" and the customer loses the $500 premium - and this is the maximum potential loss. If the market rises, the long put expires "out the money." However, the stock can be sold at the higher market price creating a profit. The maximum potential gain comes from the stock position and is unlimited - the put would expire and the stock could be sold at the higher market price. Why is the position profitable above $55? Breakeven is at $55 - the customer has paid $5 in premiums and $50 per share for the stock, for a total outlay of $55 per share. The stock must be sold for this amount to breakeven. Any movement higher results in a profit.
A customer sells short 100 shares of PDQ at $58 and buys 1 PDQ Jul 60 Call @ $3. The breakeven point is: A $55 B $57 C $61 D $64
The best answer is A. The customer sold the stock for $58 and paid $3 in premiums for the long call, for a net receipt of $55. To breakeven, the customer must buy back the stock position at this price. To summarize, the formula for breakeven for a short stock / long call position is:
A customer sells short 100 shares of ABC stock at $66 and sells 1 ABC Jan 65 Put @ $4. What is the breakeven point? A 70 B 69 C 62 D 61
The best answer is A. This is a covered put writer - an income strategy used for a flat market. As long as the price stays at $66, the put expires worthless "out the money" and the customer earns the $4 premium. If the market drops, the short put is exercised obligating the customer to buy back the stock at $65. Since the stock was sold for $66, there is a $1 per share gain on this, in addition to the $4 per share collected in premiums, for a total gain or $5 per share, or $500. If the market rises, the short put expires worthless "out the money" and the customer earns the $4 premium. If the market rises above $66 + $4 = $70 (the breakeven point), the customer will now lose on the stock that must be bought back in the market and replaced. If the market keeps on rising, the customer has unlimited potential loss. Notice that the term "covered put writer" - does not mean that the customer can't lose money - the customer can lose on the short stock position. Covered is an options term that means that if the option is exercised, there will be no loss to the option writer.
After exercising an equity options contract, the trade settles: A the next business day after trade date B 2 business days after trade date C 3 business days after trade date D 7 calendar days after trade date
The best answer is B. Exercise of a stock option results in a regular way trade. Stocks trades settle regular way 2 business days after trade date.
The exercise of an SPX (S&P 500 Index) option will result in the delivery of: A cash the next business day B cash in 2 business days C SPDRs the next business day D SPDRs in 2 business days
The best answer is A. Unlike stock options, if there is an exercise of an index option, the writer must pay the holder the "in the money" amount the next business day. There is no physical delivery of the underlying securities in the benchmark index. Note, for your information, that the SPDR is the S&P 500 Depository Receipt - it is one of the most popular exchange traded funds (ETFs) based on the S&P 500 Index
A customer would buy call contracts because the customer: A is bullish on the underlying security B is bearish on the underlying security C wishes to generate ordinary income D wishes to defer taxation of gains on the underlying stock
The best answer is A. Call contracts are bought when a customer is bullish on the market.
A customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The maximum potential gain is: A $3,300 B $3,500 C $4,200 D unlimited
The best answer is A. If the stock falls, the customer gains on the short stock position. The customer sold the stock for $38. If it falls to "0," the customer can buy the shares for "nothing" to replace the borrowed shares sold and make 38 points. The customer lets the call expire "out the money" losing 5 points, so the maximum potential gain is 33 points = $3,300.
A customer buys 100 shares of ABC stock which is trading at $65. The customer thinks the market will remain at $65 in the following months, so he decides to sell 1 ABC Sept 65 Call @ $3. ABC then goes to $60 and the customer's call contract expires and the customer decides to liquidate his stock position at the current market price. The customer has a: A $200 loss B $300 gain C $500 loss D $500 gain
The best answer is A. The customer bought the stock at $65 and sells it at $60 for a $5 loss. However, the customer collected $3 in premiums for selling the call. The net loss is $2 or $200 on 100 shares.
A customer sells short 100 shares of ABC stock at $40 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A $500 B $3,500 C $4,500 D unlimited
The best answer is A. The long call limits loss on the short stock position in a rising market. The stock was sold for $40 and can be bought back at $40 by exercising the call. The only loss to the customer is the premium paid of 5 points or $500.
Which options strategy provides the greatest profit potential in a bull market? A Long Call B Short Call C Long Put D Short Put
The best answer is A. The purchaser of a call (long call) has the right to buy stock at a fixed price, no matter how high the market price of the stock may go. This strategy has unlimited gain potential.
Which option position is used to hedge a short stock position? A long call B short call C long put D short put
The best answer is A. 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 buys 100 shares of ABC at $50 and buys 1 ABC Jan 50 Put @ $5. This position results in a profit when the price of ABC stock: A goes below $55 B goes above $55 C remains at $50 D rises to $55
The best answer is B. The customer has paid $50 for the stock and $5 for the put, for a total of $55 paid. If the market rises to $55, the customer breaks even. If the market rises above $55, the customer can sell the stock in the market for more than $55 and will have a profit. If ABC goes below 55, the customer will lose money because of the premium paid for the put, with the maximum loss being 5 points or $500 (since the stock purchased at a total cost of $55 can always be sold by exercising the $50 put).
The maximum loss for the writer of a call is: A the premium received B unlimited C strike price minus premium received D strike price plus premium received
The best answer is B. The maximum gain for the writer of a call occurs if the market price drops and the call expires "out the money." In this case, the call writer keeps the collected premium. However, if the market price rises and the call goes "in the money," the call will be exercised obligating the writer to deliver the stock at a fixed price. Since the stock must be purchased at a higher market price for delivery, the loss potential for the call writer is unlimited. To breakeven, the premium received must be lost in a rising market. This occurs if the market price rises to the strike price plus the premium paid.
A customer sells 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. The breakeven point is: A $52 B $56 C $64 D $68
The best answer is B. The writer collected $4 in premiums by obligating him- or herself to buy the stock at $60. If exercised, the customer's net outlay is $56 for the stock. To breakeven, the customer must be able to sell the position for $56. To summarize, the formula for breakeven on a short put is:
To generate additional income in a stable market, a customer who is long stock could: A buy a call B sell a call C buy a put D buy a straddle
The best answer is B. Covered call writing is used to generate extra income from a long stock position in a stable market. Buying a call is profitable in a rising market. Buying a put is profitable in a falling market. Buying a straddle is profitable in either a rising or falling market.
A customer sells short 100 shares of PDQ at $47 and sells 1 PDQ Sep 50 Put @ $6. The maximum potential gain while both positions are in place is: A 0 B $300 C $600 D unlimited
The best answer is B. If the market falls, the short put is exercised and the stock must be bought at $50. Since it was already "sold" at $47, there is a loss of $3 per share ($300 total). But the customer collected $600 in premiums; so the end result is a net gain or $300. This is the maximum potential gain. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss.
A customer sells 2 ABC Jan 45 Puts @ $3 when the market price of ABC is $46. The maximum potential loss for the customer is: A $600 B $8,400 C $9,000 D $9,200
The best answer is B. If the market goes to zero, the put writer will experience the maximum potential loss. The writer of the puts will be exercised, forcing the writer to buy worthless stock at the $45 strike price. However, the customer has received $3 per share in premiums. The net loss is $42 per share x 200 shares = $8,400.
A customer buys 1 ABC Jul 35 Put at $3 when the market price of ABC is 36. ABC stock rises to $42 and stays there through July. The customer: A gains $300 B loses $300 C gains $400 D loses $700
The best answer is B. If the market rises to $42, the put expires "out the money" (since the strike price is $35). The customer loses the $300 premium paid.
A customer purchases 100 shares of ABC stock at $44 and buys 1 ABC Jan 45 Put @ $7. Subsequently, the stock goes down to 35 and the customer exercises the put, selling his stock. The customer has a: A $200 loss B $600 loss C $700 loss D $200 gain
The best answer is B. The customer is worried that the market price of the stock will go down and so to hedge this position, he or she buys a put. So, when the market does go down, the customer can sell the stock that he or she owns at the strike price of the put - in this case $45. The customer bought the stock at $44, and can sell the stock at $45, for a $1 gain. However, the customer paid out $7 to have this right to sell stock at the strike price. So, the customer has a net $6 point loss per share.
A customer sells short 100 shares of ABC stock at $63 per share. The stock falls to $47, at which point the customer writes 1 ABC Sept 45 Put at $2. The stock falls to $36 and the put is exercised. The customer has a gain per share of: A 18 points B 20 points C 27 points D 29 points
The best answer is B. The customer sold the stock short at $63 per share (sale proceeds). Later, the customer sold a Sept 45 Put @ $2 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $45 per share. Since the customer received $2 in premiums when the put was sold, the net cost to the customer is $43 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is $63 sale proceeds - $43 cost basis = 20 points.
In November, a customer buys 1 ABC Jan 70 Call @ $4 when the market price of ABC is 71. If ABC falls to $67 and stays there through January, the customer will: A gain $400 B lose $400 C gain $6,700 D lose $6,700
The best answer is B. The holder of a call pays the premium for the contract. This is the maximum loss if the contract expires "out the money."
The premium on a call or put option is the: A exercise price of the contract B cost of the contract C market price of the underlying instrument D cost of the underlying instrument
The best answer is B. The premium on an option contract is the market price of the contract
In December, a customer sells 1 ABC Jan 45 Call @ $3 when the market price of ABC is $44. If ABC falls to $43 and stays there through January, the customer will gain: A $200 B $300 C $4,500 D $4,800
The best answer is B. The writer of a call receives the premium for the contract. For a call, the contract will remain unexercised if the market price is below the strike price. The premium received is the maximum gain if the contract expires "out the money."
An inverse ETF is most similar to taking what options position(s) on the reference index? A Long Call B Short Call C Long Put D Short Put
The best answer is C. An inverse ETF is unprofitable when the market rises, and profitable when the market falls. So the answer is either a Long Put or a Short Call. Since the maximum loss in a rising market is capped to the amount invested, and the gain keeps increasing as the market falls, the best choice is a Long Put, which has a maximum loss of the premium in a rising market and ever-increasing gain as the market falls. In contrast, with a Short Call, in a rising market there is ever-increasing loss, and in a falling market, the gain is capped to the collected premium.
A customer purchases 100 shares of MNO stock at $34.63 and buys 1 MNO Jan 30 Put @ $2.75 on the same day in a cash account. Subsequently, the stock goes to $43.50 and the customer's put expires and the customer sells the stock in the market at the prevailing market price. The customer has a(n): A $275 loss B $346.30 loss C $612 gain D $887 gain
The best answer is C. The customer buys the put for $2.75 and buys the stock at $34.63 per share. The customer purchases the Jan 30 Put as protection if the stock price falls below $30. If the stock does fall below $30 per share, then the customer would exercise the put, selling the stock at $30. This limits downside loss. In this case, the stock price rises to $43.50 and the put expires "out the money." The stock is sold at the prevailing market price. The stock that was purchased for $34.63, is sold for $43.50, for a profit of $8.87 per share. Since a premium of $2.75 was paid for the put, the net profit is $6.12 per share = $612 on the 100 shares owned.
In November, a customer buys 1 ABC Jan 70 Call @ $4 when the market price of ABC is $71. The breakeven point for the position is: A $66 B $67 C $74 D $75
The best answer is C. The holder of a call breaks even if the market price rises by enough to recover the premium paid. The holder paid $4 for the right to buy stock at $70. The effective cost if he or she exercises is $74. The holder must be able to sell the stock for $74 to breakeven. To summarize, the formula for breakeven on a long call is:
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.
If the market price is below the strike price on a call contract, the difference is termed the: A in the money amount B at the money amount C out the money amount D time value amount
The best answer is C. An option contract is "out the money" if exercise would be unprofitable to the holder, ignoring any premiums paid. This occurs if the market price is below the strike price on a call contract. For example, 1 ABC Jan 50 Call, when the market price is $45, is out the money by 5 points. The holder would let this contract expire. There is no reason to buy the stock at $50 per share when the market price is $45 per share.
A customer buys 100 shares of ABC stock at $40 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is: A $200 B $500 C $700 D unlimited
The best answer is C. If the market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $40 for the $45 strike price, resulting in a $500 gain. Since $200 was collected in premiums, the total gain is $700. This is the maximum potential gain while both positions are in place.
A customer sells 1 ABC Jul 45 Put at $5 when the market price of ABC is $43. ABC stock rises to $53 and stays there through July. The customer: A gains $300 B loses $500 C gains $500 D loses $800
The best answer is C. If the market rises to $53, the put expires "out the money" (since the strike price is $45). The writer keeps the $500 collected in premiums.
If the writer of an equity put contract is exercised, the writer must deliver: A cash in 1 business day B stock in 1 business day C cash in 2 business days D stock in 2 business days
The best answer is C. If the writer of an equity put contract is exercised, he is obligated to buy the stock at the strike price (paying cash) from the holder of the put. Settlement is 2 business days after exercise date - this is a regular way stock trade.
A customer sells 2 ABC Jan 50 Calls @ $3 when the market price of ABC is at $52. The maximum potential gain for the position is: A $200 B $300 C $600 D unlimited
The best answer is C. The maximum potential gain for the writer of a naked call option is the premium received. This occurs if the market drops and the call expires "out the money." In this case, there are 2 contracts, so the maximum gain is the $300 collected premium x 2 contracts = $600.
A customer is long 10 ABC Jan 60 Call contracts. ABC Corporation has just declared a $1 per share dividend. To receive the dividend, the customer must: A sell the contracts prior to the ex date B sell the contracts prior to the record date C file an effective exercise notice with the Options Clearing Corporation prior to the ex date D file an effective exercise notice with the Options Clearing Corporation after the ex date
The best answer is C. To receive a dividend, the holder of a call contract must exercise the contract prior to the ex date. Since settlement of exercise takes place in 2 business days, the customer will have settled the exercise on, or before, the record date, and will receive the dividend.
Which of the following is NOT standardized for listed option contracts? A Contract size B Expiration date C Strike price interval D Commissions and exercise Costs
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. Any fees/commissions levied on options trades or assignments by broker-dealers are negotiable.
A customer sells short 500 shares of XYZ stock at $69 and sells 5 XYZ Jan70 Puts @ $3. The maximum loss potential is: A $500 B $6,600 C $6,700 D Unlimited
The best answer is D. The client is shorting stock and selling puts. This is a "covered put writer" - which is an income strategy in a flat market. If the market price falls, the puts are exercised, obligating the customer to buy the stock at $70. Since the stock was sold at $69, the customer loses $1 per share, but makes $3 in collected premiums, for a net gain of $2 per share. The gain would be $2 points x 500 shares = $1,000. If the market price rises, the puts expire worthless, leaving the customer with a short stock position that has unlimited loss potential in a rising market. Thus, the maximum potential loss is unlimited.
A customer buys 100 shares of ABC stock at $50 and buys 1 ABC Jan 50 Put @ $5. The maximum potential gain is: A $500 B $4,500 C $5,500 D unlimited
The best answer is D. The customer has paid $50 for the stock and $5 for the put, for a total outlay of $55. If the stock declines, he or she is hedged, since he or she has the right to sell for $50 by exercising the long put; so only 5 points can be lost. However, if the stock rises, he or she lets the put expire "out the money" and the customer can ride the price of the stock up, with theoretically unlimited gain potential
An options strategy where the maximum potential loss is equal to the difference between the increase in value of the underlying short securities position and the premiums received is a: A naked call writer B covered call writer C naked put writer D covered put writer
The best answer is D. A covered put writer sells a put contract against the underlying short physical security position. If the market rises, the put expires unexercised and the writer keeps the premium. However, as the market rises, the customer loses on the short security position. Thus, the maximum potential loss is the rise in value of the short security position, net of collected premiums.
The owner of an American style option can exercise the contract: A only on the business day preceding the expiration date B only on the expiration date C at any time, up to, but not including, the expiration date D at any time, up to and including, the expiration date
The best answer is D. An "American Style" option is one that can be exercised at any time. In contrast, a "European Style" option is one that can only be exercised at expiration. American style options can be exercised up to and including the expiration date - and listed options expire on the 3rd Friday of the expiration month.