ch 14

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Jamie 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 contract was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.

A) $23.50

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

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%

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

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

Stocks options that trade in the January cycle will have contracts available that expire in

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

Which of the following statements concerning put options are correct?

A) The writer of a put profits if the price of the underlying stock rises.

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

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.

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as

A) leverage.

In nearly all cases, the purpose of a hedge is to

A) reduce or eliminate risk.

The option premium is

A) the market price of the option.

Nowel Inc. stock is currently priced at $42. The present value of the strike price of a call option on this stock is $44. Probability one, as calculated by the Black Scholes option pricing model is .6541; probability 2 is .3722. The value of this option as calculated by Black-Scholes is

B) $11.10.

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.

B) $12

What is the time value of a put with a strike price of $30 when the option price is $500 and the underlying common stock sells for $27?

B) $200

NZMA stock is currently selling for $128. Which of the following options is "in-the- money"?

B) February 125 call

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.

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

B) I and IV only

Quotations in an option chain will show I. the most recent bid and ask prices of the option II. puts and calls for the same expiration date. III. the strike price. IV. the highest and lowest price for the option in the previous month.

B) I, 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

B) III and IV only

One reason that writing options can be a viable and profitable investment strategy is that

B) most options expire unexercised.

Which one of the following actions would be the most appropriate hedge to a short sale of common stock?

B) purchase of a call

Warrants are generally created when

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

A put has fundamental value as long as

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

The writer of a put option hopes that the price of the underlying stock will rise because

B) the option is less likely to be exercised.

An American call option gives the owner

B) the right but not the obligation to buy the stock at the strike price on or before the expiration date.

The two provisions which investors should carefully consider when evaluating stock options are the

B) time until expiration and the strike price.

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

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

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.

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

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

Which of the following variables are part of the Black-Scholes option pricing model? I. the market price of the underlying stock II. the volatility of the underlying security III. the strike price of the option IV. the risk-free rate of interest V. the beta of the underlying security VI. the time remaining before the option expires

C) I, II, III, IV and VI 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

Which of the following is true about rights?

C) They are a type of short-lived call option.

The strike price of a put option is the price

C) at which the underlying stock can be sold.

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

Warrants

C) have a stipulated price and an expiration date.

For all practical purposes, listed stock options always expire

C) on the third Friday of the expiration month.

The writer of a put or call is the

C) party who creates an option by selling it.

The most important factor affecting the market price of a put or call is the

C) price behavior of the underlying common stock.

In late November, Karen bought FIB February puts with a strike price of $25. The ask price of the put was $281. The current price of FIB shares is $28.40. The intrinsic value of the put is

D) $0.00.

What is the intrinsic value of a call with a strike price of $40 a market price of $44? The call's ask price $540.

D) $400

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

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?

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

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

D) I, III and IV only

LEAPS is an acronym for

D) Long-Term Equity Anticipation Securities.

Which one of the following statements concerning options is correct?

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

Writers of option contracts

D) earn a profit when the option expires without being exercised.

Purchasers of stock options

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

LEAPS are a special type of option

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

A naked option is a conservative investment with limited risk. T/F

False

A put option has a strike price of $32. The current price of the stock is $34. The put option is said to be "in-the-money." T/F

False

American style options can only be exercised on their expiration dates. T/F

False

An options strike price is the stock price at which the option holder breaks even. T/F

False

Covered call writers have unlimited loss exposure as well as unlimited profit potential. T/F

False

If a stock price does not rise or fall by the amount of the option premium, the option will not be exercised. T/F

False

It is riskier to buy an option than to write an option. T/F

False

Options premiums tend to be smaller as the time to expiration increases. T/F

False

Puts and calls are issued by the same corporation that issued the underlying stock. T/F

False

Rights and warrants are the riskiest types of options. T/F

False

Standardized options expire on the last business day of the expiration month. T/F

False

The buyer of a call option has the right to any dividends paid after the option was purchased, but only if the option is exercised. T/F

False

The longer the time to expiration, the lower the option time premium tends to be. T/F

False

The owner of a put is obliged to sell the underlying security at the strike price on the date of expiration. T/F

False

The party that accepts the legal obligation to stand behind the option is the buyer of the contract. T/F

False

The prices of puts and calls on the same stock move independently of one another. T/F

False

Warrants are short-term options usually expiring within a year or less. T/F

False

Writing covered calls protects the writer from losses if the price of the underlying stock declines. T/F

False

A listed option's ask price is always higher than its bid price. T/F

Fasle

Investors buy options at the bid price and sell at the ask price. T/F

Fasle

Listed options are difficult to sell in the secondary market. T/F

Fasle

The buyer of a put expects the price of the underlying stock to rise. T/F

Fasle

The value of a put increases as the price of the underlying security rises. T/F

Fasle

The price behavior of the underlying security is the primary determinant of the price of an option. T/F

Treu

Warrants are options, often attached to bond issues, to make the bonds more attractive to investors. t/F

Treu

An option straddle is the simultaneous purchase (or sale) of both a put and a call option on the same underlying security. T/F

True

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities. T/F

True

European options can only be exercised on the expiration date but can be sold to another investor on any trading day. T/F

True

For a spread to be successful, the difference in strike prices must be greater than the net cost of the purchased option(s). T/F

True

For the writer of in-the-money covered calls , losses on the options contract will be nullified by gains on the stock. T/F

True

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security. T/F

True

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration. T/F

True

One of the primary advantages of options is the leverage they provide. T/F

True

Options allow investors to speculate on price movements without a large initial investment. T/F

True

Options can provide a lot of price action for a limited dollar investment. T/F

True

Paul writes a put with a strike price of $35. The most he could lose by writing the put is $3,500. T/F

True

Rights are call options issued to current owners of the stock and normally expire within a short period of time. T/F

True

Technically, listed options expire on the Saturday following the third Friday of the expiration month. T/F

True

The buyer of a put and the writer of a call both profit if the price of the stock falls. T/af

True

The majority of today's options are stock options traded primarily on the CBOE and on AMEX. T/F

True

The maximum amount the buyer of a put can lose is the cost of the option. T/F

True

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium. T/F

True

The option premium is the price of the option. T/F

True

The value of a call increases as the price of the underlying security rises. T/F

True

The writer of a call option is theoretically exposed to an unlimited loss. T/F

True

The writer of an option creates the option by selling it. T/F

True

Writing covered calls may result in a profit to the writer even if the stock price does not change. T/F

True


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