Chapter 10: Option Fundamentals

An investor buys 1 ABC May 60 call for a premium of 3. Later, ABC stock rises to $70 and the option is exercised. If the stock is subsequently sold at $73, what's the result?

$1,000 gain

An investor writes an uncovered XYZ June 15 put for a premium of 2. What's the maximum loss on the investor's position?

$1,300

When XYZ is trading at $38, an investor purchases one XYZ October 40 put and pays $500. The intrinsic value of the option is:

$200

What's the breakeven price for an investor who writes an uncovered RST May 25 put for a premium of 4?

$21

A customer buys an DLR call option and pays a 2.50-point premium. The aggregate dollar amount paid is:

$250.00

An investor buys 1 XYZ Jan 35 put for a premium of 3.50. What's the investor's maximum gain?

$3,150

An investor buys 1 ABC May 60 call for a premium of 3. What's the investor's maximum loss?

$300

An investor buys 1 XYZ Jan 35 put for a premium of 3.50. At what price must XYZ be trading for the investor to breakeven?

$31.50

An investor buys 1 XYZ Jan 35 put for a premium of 3.50. What's the investor's maximum loss?

$350

An investor sells an RST July 75 call for a premium of 4.25. Later, just prior to expiration when RST is trading at 83, the investor closes out the position at its intrinsic value. What's the result?

$375 loss

An investor sells an RST July 75 call for a premium of 4.25. What's the investor's maximum gain?

$425

An investor sells 1 DEF Apr 90 put for a premium of 5.75. Later, just prior to expiration when DEF is trading at 80, the investor closes out the position at its intrinsic value. What's the result?

$425 loss

An investor buys 1 XYZ Jan 35 put for a premium of 3.50. Later, XYZ stock falls to $27 and the option is exercised. What's the result for the investor?

$450 gain

When the market price of XRT is at $50 per share, an individual buys an XRT October 50 put for a premium of 5. If the put expires, what's the individual's maximum loss?

$500

An investor sells 1 DEF Apr 90 put for a premium of 5.75. What's the investor's maximum gain?

$575

An investor buys 1 ABC May 60 call for a premium of 3. At what price must ABC to be trading for the investor to breakeven?

$63

On September 22, a customer purchases two listed XYZ May 70 calls and pays a $4 premium for each call. The current market price of XYZ Corporation is $73 per share. What's the customer's breakeven point?

$74

An investor sells an RST July 75 call for a premium of 4.25. At what price may RST be trading for the investor to breakeven?

$79.25

An investor sells 1 DEF Apr 90 put for a premium of 5.75. What's the investor's maximum loss?

$8,425

An investor sells 1 DEF Apr 90 put for a premium of 5.75. At what price may DEF be trading for the investor to breakeven?

$84.25

An options investor has purchased an XYZ December 40 put at 4. If the market price of XYZ is $39, what's the intrinsic value of this option?

1

On October 25, an individual purchased five listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share. When will the call options expire?

10:59 p.m. Central Time (11:59 p.m. Eastern Time) on the third Friday of the expiration month

An investor writes an uncovered RST May 25 put for a premium of 4. What's the investor's maximum loss?

2100

Listed equity options stop trading at:

3:00 p.m. Central Time (4:00 p.m. Eastern Time) on the expiration date

Listed equity options cease trading at:

4:00 p.m. ET on the expiration date

An investor who holds a listed option can no longer close the position with the sale of an offsetting position after:

4:00 p.m. ET on the third Friday of the expiration month

The exchanges require customers to exercise their listed equity option positions with member firms by no later than:

5:30 p.m. Eastern Time on the expiration date of the option

How many shares are represented by 70 ABC put options?

7,000

Which of the following transactions will eliminate a short position in a listed option?

A closing purchase

A customer wants to close out a long option position by liquidating the option. The registered representative should mark the order ticket:

Closing sale

If the seller of an index option is exercised against when the option is in-the-money option, she will:

Pay cash

For the holder of a call, it's MOST beneficial if the price of the underlying security:

Rises

Which of the following option positions has the potential for an unlimited loss?

Short call

The writer of a covered call is:

Short the call, and long the stock

Which of the following statements is TRUE regarding the purchaser of a call option?

The purchaser limits the amount of money he could lose if the underlying stock declines.

If an investor is long 100 shares of EFG stock and short an EFG call, what's the maximum loss?

The stock's purchase price minus the call's premium

A client buys 100 shares of XYZ Corporation at $27 per share and writes an XYZ October 30 call at a $3 premium. The XYZ October 30 call option will expire on:

The third Friday of October

An investor has written an uncovered call. This position will be considered closed in each of the following circumstances, EXCEPT:

The writer purchases the underlying stock

An investor buys 1 ABC May 60 call for a premium of 3. What's the investor's maximum gain?

Unlimited

An investor sells an RST July 75 call for a premium of 4.25. What's the investor's maximum loss?

Unlimited

An investor owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The MOST conservative strategy to achieve this objective is to:

Write covered calls

The term "opening sale" applies to a:

Writer of an option

The term "opening sale" applies to the:

Writer of an option

If an investor writes an ABC put and the option is exercised, he must:

Buy ABC

An investor buys 1 XYZ Jan 35 put for a premium of 3.50. What's the investor's strategy?

Bearish

An investor sells an RST July 75 call for a premium of 4.25. What's the investor's strategy?

Bearish

If a client writes a call, what position is taken on the underlying interest of the option?

Bearish

An investor buys 1 ABC May 60 call for a premium of 3. What's the investor's strategy?

Bullish

An investor sells 1 DEF Apr 90 put for a premium of 5.75. What's the investor's strategy?

Bullish

Upon exercise, the holder of a long put will profit if the price of the underlying stock:

Falls below the exercise price minus the premium paid

If a customer chooses to exercise his option, to whom does he provide notification?

His broker-dealer

A client owns 1 ABC Nov 35 Put at 2.50, and the current market price for ABC stock is $33. This position is considered:

In-the-money

With ABC trading at 43, an ABC April 40 call has a premium of 4.50. What's the intrinsic value and time value of the option?

Intrinsic value is 3 and the time value is 1.50

An investor sold 5 ALTB April 70 calls and received a premium of $6 for each option. If the market price of ALTB was $74 at the time the options were sold, the options had:

Intrinsic value of 4 and a time value of 2

If an ABC July 40 put option is exercised, the writer:

Is obligated to purchase 100 shares of ABC stock

A put option is considered out-of-the-money if the:

Market value of the underlying stock is above the strike price