Chapter 15

provides a payoff if the firm's stock price falls below some specified dollar amount during the term of the option

A down-and-in option _______________.

the exchanges on which stock options are traded

The Option Clearing Corporation is owned by _________.

call premium

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

long straddle

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 _________.

money spread

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

time spread

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

covered call

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

protective put

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

I, II and III

You own $75,000 worth of stock and you are worried the price may fall by year end in 6 months. You are considering either using puts or calls to hedge this position. Given this, which of the following statements is/are correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely the hedging with puts is probably better than hedging with short calls.

greater; greater

You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell so you are considering purchasing either at the money or out of the money puts. If you decide to purchase the out of the money puts your maximum loss is __________ than if you buy at the money puts and your maximum gain is __________.

Max(-C0, ST - X - C0)

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________ where X equals the option's strike price, ST is the stock price at contract expiration and C0 is the original purchase price of the option.

Min(P0, ST - X + P0)

You write a put option on a stock. The profit at contract maturity of the option position is ___________ where X equals the option's strike price, ST is the stock price at contract expiration and P0 is the original premium of the put option.

Writing an uncovered put option

__________ is the most risky transaction to undertake in the stock index option markets if the stock market is expected to fall substantially after the transaction is completed.

european

an _____ option can ONLY be exericised on the expiration date

collar

an options strategy that brackets the value of a portfolio between two bounds

conversion value of the bond

A convertible bond is deep in the money. This means the bond price will closely track the __________.

Sell a straddle

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

Buy a strap

You are convinced that a stock's price will move by at least 15% over the next three months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

American, more, European

All else the same, an ______ style option will be ______ valuable than a ______ style option.

buy the underlying asset at the exercise price on or before the expiration date

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

sell the underlying asset at the exercise price on or before the expiration date

An American put option gives its holder the right to _________.

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

An Asian call option gives its holder the right to ____________.

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

An Asian put option gives its holder the right to ____________.

are not; are

Buyers of listed options __________ required to post margins and writers of naked listed options __________ required to post margins.

100

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

Buy the call, sell the put; lend the present value of $40

How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

long call

If you combine a long stock position with buying an at the money put option the resulting net payoff profile will resemble the payoff profile of a _______.

short put

If you combine a long stock position with selling an at the money call option the resulting net payoff profile will resemble the payoff profile of a _______.

CBOE

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

unlimited

The potential loss for a writer of a naked call option on a stock is _________.

digital

A "bet" option is also called a ____ option.

buy the underlying asset at the exercise price only at the expiration date

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

barrier

A down-and-out option is one type of ________ option.

Asian

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called an ______ option. A. American B. European C. Asian D. Australian

third Friday

Exchange traded stock options expire on the _______________ of the expiration month.

$5

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

warrants

Longer term American style options with maturities of up to three years are called __________.

I, II and III only

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

II only

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

agrees to buy shares at a set price if the option holder desires

The writer of a put option _______________.

I, II and III

Warrants differ from listed options in that ________. I. exercise of warrants results in dilution of a firm's earnings per share II. when warrants are exercised new shares of stock must be created III. warrant exercise result in cash flows to the firm whereas exercise of listed options does not

Long call and short put

What combination of puts and calls can simulate a long stock investment?

Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in cash.

Which one of the statements about margin requirements on option positions is not correct? A. The margin required will be higher if the option is in the money. B. If the required margin exceeds the posted margin the option writer will receive a margin call. C. A buyer of a put or call option does not have to post margin. D. Even if the writer of a call option owns the stock the writer will have to meet the margin requirement in cash.

purchase a futures contract at a specified price for a specified period of time

A futures call option provides its holder with the right to ___________.

a payoff determined by either the maximum or minimum price of the underlying stock during the life of the option

A lookback option provides its holder with _______________.

in the money

A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option is _________.

the right to exchange the payoff from a foreign investment for dollars at a fixed exchange rate

A quanto provides its holder with ______________.

decrease, decrease

A writer of a call option will want the value of the underlying asset to __________ and a buyer of a put option will want the value of the underlying asset to _________.

Protective put

What strategy could be considered insurance for an investment in a portfolio of stocks?

spread

a combo of two or more call options or put options on the same asset with differing exercise prices or times to expiration

sell the underlying asset at the exercise price only at the expiration date

A European put option gives its holder the right to _________.

in the money

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 _________.

straddle

A combo of a call and a put, each with the same exercise price and expiration date

Price stability

A covered call strategy benefits from what environment?

expires worthless if the firm's stock price falls below some specified dollar amount during the term of the option

A down-and-out option _______________.

Max(0, ST - X)

At contract maturity the value of a call option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.

LEAPS

Longer term American style options with maturities of up to three years are called __________.

Contracts that are tailored to meet the needs of market participants

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

C. Max(0, X - ST)

At contract maturity the value of a put option is ___________ where X equals the option's strike price and ST is the stock price at contract expiration.

Collar

What strategy is designed to ensure a value within the bounds of two different stock prices?

deep out of the money

When issued most convertible bonds are issued _____________.

Short call and long put

Which of the following strategies makes a profit if the stock price declines and loses money when the stock price increases?

Short call and short put

Which of the following strategies makes a profit if the stock price stays stable?

Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

Which one of the following is a correct statement?

OEX

Which one of the following is the ticker symbol for the CBOE option contract on the S&P100 index?

Bull spread

Which strategy benefits from upside price movement and has some protection should the price of the security fall?