Chp. 14 FIN 334

What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24? A) $100 B) $200

A) $100

Jaime wrote a nine-month put on Beta stock. The strike price was $25 and the market price at the time the option was written was $24. The total price of the option was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes. A) $23.50 B) $24.00

A) $23.50

Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is ________ and his maximum gain is ________. A) $375, $125 B) $375, unlimited

A) $375, $125

Grant purchased one call on XYZ stock at an exercise price of $25. The market price of XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction-related costs. A) $380 B) $480

A) $380

The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes. A) 150% B) 200%

A) 150%

Which of the following increase(s) the time premium of a call option? I. a market price that exceeds the strike price II. increasing volatility in the market price of the underlying security III. decreasing market interest rates IV. decreasing the time to option expiration A) II only B) I and II only

A) II only

Stocks options that trade in the January cycle will have contracts available that expire in A) January, February, April, and July. B) March, June, September, December.

A) January, February, April, and July

Which of the following is a possible official expiration date for a standardized option contract? A) Saturday, October 17 B) Monday, March 1.

A) Saturday, October 17

If the Canadian dollar became stronger relative to the U.S. dollar, the price of A) a call option on the Canadian dollar will increase. B) a put option on the Canadian dollar will increase.

A) a call option on the Canadian dollar will increase.

Tiffany would like to own shares of Blackwood, Inc. but only if she can acquire them at a total cost of $30 a share or less. Blackwood is currently trading at $31.76. Cynthia should ________ with a strike price of $30. Ignore transaction costs. A) buy a call B) buy a put.

A) buy a call

ETF options are settled in A) cash. B) ETF shares.

A) cash.

For a call purchased on an organized security exchange, the strike price specifies the A) contractual price at which each of the shares of the underlying stock can be bought. B) prevailing market price of one share of the underlying stock.

A) contractual price at which each of the

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as A) leverage. B) straddling.

A) leverage.

The premium on a stock index call would be expected to increase as the A) market becomes more volatile. B) option life nears expiration.

A) market becomes more volatile.

In nearly all cases, the purpose of a hedge is to A) reduce or eliminate risk. B) make a very high profit in an extremely short time frame.

A) reduce or eliminate risk.

One of the major disadvantages of options is A) their lifespan. B) their cost.

A) their lifespan.

Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price was $10. What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes. A) $10 B) $12

B) $12

NZMA stock is currently selling for $128. Which of the following options is "in-the-money"? A) March 130 call B) February 125 call

B) February 125 call

In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit? I. the writer of the call II. the buyer of the call III. the writer of the put IV. the buyer of the put A) II and III B) I and III

B) I and III

Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following statements are true given this information? I. Rex's option is worth at least $100 today. II. Rex's option is worthless today. III. Rex's option has more value today than when he bought it. IV. Rex's option has less value today than when he bought it. A) I and III only B) I and IV only

B) I and IV only

Which of the following represent in-the-money options? I. a call when the market price exceeds the strike price II. a call when the strike price exceeds the market price III. a put when the market price exceeds the strike price IV. a put when the strike price exceeds the market price A) I and III only B) I and IV only

B) I and IV only

Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has I. limited her losses to $275. II. unlimited loss potential. III. limited her gains to $275. IV. unlimited profit potential. A) I and IV only B) II and III only

B) II and III only

The buyer of a listed American option has which of the following rights? I. the right to change the expiration date II. the right to change the strike price III. the right to resell the option IV. the right to let the option expire unexercised A) I and III only B) III and IV only

B) III and IV only

One could temporarily protect profits on a highly diversified portfolio of large company stocks by A) selling S&P 500 Index put options. B) buying S&P 500 Index put options.

B) buying S&P 500 Index put options.

The writer of a covered call has taken a(n) A) conservative investment position with unlimited potential profits. B) conservative investment position with limited profits.

B) conservative investment position with limited profits.

The value of an interest rate call option A) varies directly with the price of the underlying corporate bond. B) increases when the yield on the underlying Treasury security rises.

B) increases when the yield on the underlying Treasury security rises.

The writer of a put A) accepts the obligation to sell a predetermined number of shares at a predetermined price. B) is betting the price of the underlying security will increase in value.

B) is betting the price of the underlying security will increase in value.

One reason that writing options can be a viable and profitable investment strategy is that A) the option writer collects the quarterly dividends. B) most options expire unexercised.

B) most options expire unexercised.

Which one of the following actions would be the most appropriate hedge to a short sale of common stock? A) sale of a call B) purchase of a call

B) purchase of a call

Warrants are generally created when A) a firm decides to execute a stock split. B) the issuing corporation decides to sweeten a bond issue.

B) the issuing corporation decides to sweeten a bond issue.

A put has fundamental value as long as A) the market price of the underlying financial asset has a positive value. B) the market price of the underlying financial asset is less than the strike price.

B) the market price of the underlying financial asset is less than the strike price.

The two provisions which investors should carefully consider when evaluating stock options are the A) strike price and the exchange ratio. B) time until expiration and the strike price.

B) time until expiration and the strike price.

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as A) writing a naked call. B) writing a covered call.

B) writing a covered call.

What is the fundamental value of a put contract with a strike price of $25 when the option price is $1.50 and the underlying common stock sells for $26? C) $0.00 D) -$100

C) $0.00

Jason purchased a six-month put on ABC stock at a cost of $100. The strike price was $15. At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes. C) $14 D) Cannot be determined from the information provided

C) $14

Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of C) $2,640. D) $3,000.

C) $2,640.

Lew paid $300 to purchase a call on Delta stock with a strike price of $25. What does the market price of Delta have to be for Lew to break-even on his option investment? Ignore transaction costs and taxes. C) $28 D) Cannot be determined from the information provided

C) $28

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract? C) $3,250 D) Her profit potential is unlimited.

C) $3,250

Bill owns 200 shares of EG stock. In November, the market price of EG was $15.45. Bill sold two March 16 calls on EG for $246. Between November and March, EG stock fluctuated between $14.75 and $15.85. EG paid a quarterly dividend of $0.40 per share on January 31. Over the November-March period, Bill earned C) $336. D) $256.

C) $336.

Bob's DJIA Index option had a strike price of 98. When he exercised the option, the Dow was at 10,050. C) Bob received $250 from the writer of the contract. D) Bob received $700 from the writer of the contract.

C) Bob received $250 from the writer of the contract.

Which of the following characteristics apply to warrants? I. Warrants are similar to call LEAPS. II. Warrants pay quarterly dividends. III. Warrants can generate capital gains. IV. Warrants normally cover two or less shares of the underlying security. C) I, III and IV only D) III and IV only

C) I, III and IV only

Allison bought 100 shares of MIKO, Inc. stock at a price of $35 a share. In addition, she bought a 35 put on MIKO at a cost of $125. Which of the following are true about Allison's position from now until the option expiration date? I. Her maximum loss is $3,625. II. Her maximum loss is $125. III. Her minimum gain is $125. IV. Her maximum profit is unlimited. C) II and IV only D) II, III and IV only

C) II and IV only

Anthony is confident that shares of SolarTech will greatly increase in value, but thinks that it may be a year or more before that happens. He should buy C) LEAP calls. D) Index calls.

C) LEAP calls.

Which of the following statements concerning Long-term Equity AnticiPation Securities (LEAPS) is correct? C) LEAPS typically have a higher quoted price than that of a regular option. D) LEAPS generally have a longer life than a warrant.

C) LEAPS typically have a higher quoted price than that of a regular option.

Kyle believes the price of Ajax stock is about to decrease. If he wants to profit from the decline in price, he should ________ on Ajax stock. C) buy a put D) sell a put

C) buy a put

Warrants C) have a stipulated price and an expiration date. D) are not traded in the secondary markets because of their low unit costs.

C) have a stipulated price and an expiration date.

Listed options C) have readily available price information. D) are sold over the counter.

C) have readily available price information.

For all practical purposes, listed stock options always expire C) on the third Friday of the expiration month. D) three months from the date of the option purchase.

C) on the third Friday of the expiration month.

The currency option strike price of 163 means that C) one unit of the foreign currency is worth $1.63. D) one unit of the foreign currency is worth $163.

C) one unit of the foreign currency is worth $1.63.

The maker of a put or call is the C) party who writes the option. D) party who decides whether or not the option is exercised.

C) party who writes the option.

The most important factor affecting the market price of a put or call is the C) price behavior of the underlying common stock. D) price behavior of the corresponding warrant.

C) price behavior of the underlying common stock.

The strike price of a put option is the price C) the price at which the underlying stock can be sold. D) the price at which the underlying stock can be bought.

C) the price at which the underlying stock can be sold.

The purchase of a June 25 call on XXO stock and the sale of a June 30 call on XXO stock is known as a C) vertical spread. D) horizontal spread.

C) vertical spread.

If the S&P 500 index is at 1,061, then the cash value of an S&P 500 index option is C) $10,610. D) $106,100.

D) $106,100.

What is the fundamental value of a call with a strike price of $30 and a market price of $33? C) $3 D) $300

D) $300

Fred bought 600 shares of Edgewood stock at a price of $19. The stock is currently selling for $53 a share. To protect his profits, Fred should buy C) 6 call options with a strike price of $55. D) 6 put options with a strike price of $50.

D) 6 put options with a strike price of $50.

Which one of the following was the first listed exchange for stock options in the United States? C) New York Stock Exchange D) Chicago Board Options Exchange

D) Chicago Board Options Exchange

Which of the following affect the value of puts and calls written on shares of common stock? I. price volatility of the underlying stock II. current market price of the underlying stock III. length of time until the option expiration date IV. current market interest rate C) II, III and IV only D) I, II, III and IV

D) I, II, III and IV

Which of the following statements concerning options are correct? I. Options are derivative securities. II. The value of an option is dependent upon the value of the underlying security. III. The seller of the option retains the option premium whether or not the option is exercised. IV. Options can provide leverage benefits. C) I, II and IV only D) I, II, III and IV

D) I, II, III and IV

Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct? I. short the stock II. buy a call at 50 III. write a call at 55 IV. buy a put at 45 C) III and IV only D) I, III and IV only

D) I, III and IV only

Stock index options can be used for which of the following investment purposes? I. protect a portfolio from market declines II. speculate on the price appreciation of a particular common stock III. take advantage of a leverage opportunity IV. create a portfolio hedge C) I and III only D) I, III and IV only

D) I, III and IV only

Which one of the following statements concerning options is correct? C) The owner of a call is entitled to the dividends paid on the underlying shares of stock. D) Option holders can profit on movements of the price of the underlying security.

D) Option holders can profit on movements of the price of the underlying security.

Which of the following is true about rights? C) They are a type of short-lived call option. D) They are a type of short-lived put option.

D) They are a type of short-lived put option.

Purchasers of stock options C) have the obligation to buy or sell a predetermined amount of shares at the strike price. D) have the right to buy or sell a certain number of underlying shares.

D) have the right to buy or sell a certain number of underlying shares.

A long straddle C) consists of buying a call at one strike price and then writing a call at a higher strike price. D) is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

D) is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

LEAPS are a special type of option C) that cannot be exercised for at least a year after it is is purchased. D) that may have an expiration date as long as three years.

D) that may have an expiration date as long as three years.