FINA CH 15

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

OEX

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.

max (-C0, ST - X - C0)

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.

max (0, ST - X)

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

$200 loss

You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

11,000

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

24.15 Break even = 25 - .85 = 24.15

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

5

You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

$300 loss

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

100

. Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option.

3 and 4

A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

475 E [Profit] = -{.60Max [$0, $50 - ($50)(1.1)] + .30Max [$0, $50 - ($50)(0.95)] + .10Max [$0, $50 - ($50)(.80)]} (100) + $650 = - [.6(0) + .3(250) + .1(1,000)] + 650 = $475

Which one of the statements about margin requirements on option positions is not correct?

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 following is a correct statement?

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

Longer-term American-style options with maturities of up to 3 years are called __________.

LEAPS

The initial maturities of most exchange-traded options are generally __________.

Less than 1 year

Why is the holder of an option not required to post margin under the Option Clearing Corporation rules?

Once an option is purchased, no further money is at risk.

A covered call strategy benefits from what environment?

Price stability

Which of the following expressions represents the value of a call option to its holder on the expiration date?

ST - X if ST > X, 0 if ST ≤ X

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 3 months. The price of a 3-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?

Sell a straddle

__________ 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.

Writing an uncovered put option

The writer of a put option _______________.

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

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

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

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

call premium

The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

you purchase one MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

$500 loss

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.

1 2 3

You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either 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, hedging with puts is probably better than hedging with short calls.

1 2 3

Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct? I. The value of the conversion option for bond A is $125. II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

1 and 3

Suppose you purchase one Texas Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.

150

Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.

195,000 Position value = 5,000 shares × $45/share = $225,000. To establish a collar, you would need 5,000/100 = 50 options. You would buy the 50 puts at a cost of $3(100)(50) = $15,000 and write the 50 calls, earning a premium of $2(100)(50) = $10,000. The initial cost is $15,000 - $10,000 = $5,000. If the stock price in January is $35, then profit can be found as: Profit = [Max ($0, $40 - $35) - Max ($0, $35 - $50)](100)(50) - $5,000 = $20,000 New stock value = 5,000 shares × $35 = $175,000, so Net position value = $175,000 + $20,000 = $195,000

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.

2

You purchase one MBI July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a ______ on the investment.

200 points

The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is _________.

2080

You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ______ on the investment.

300 profit

A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

33, 3.50

An investor purchases a long call at a price of $2.50. The price at expiration is $35. If the current stock price is $35.10, what is the break-even point for the investor?

37.50

You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip.

500 profit Selling an IBM July 90 strip entails selling two IBM July 90 puts and one IBM July 90 call. Initial income = C90 + 2P90 = [4 + 2(3)](100) = $1,000. If the final stock price is $95, the position value is found as: Profit = [-Max ($0, $95 - 90) + 2Max ($0, $90 - $95)](100) + $1,000 = -$500 + $1,000 = $500

You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________.

575

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 3 months. The price of a 3-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. Selling a straddle would generate total premium income of _____.

700 Sell a straddle = sell a put + sell a call Premium income for selling a straddle = (P0 + C0)100 = ($3 + $4)(100) = $700

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 3 months. The price of a 3-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. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

700 Selling a strap entails selling two calls and selling one put. Initial income = 2C0 + P0 = [(2)(4) + 3](100) = $1,100. If the final stock price is $42, the position profit is found as Profit = [-2Max ($0, $42 - 40) + Max ($0, $40 - $42)](100) + $1,100 = $700

You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______.

85 Initial cost = -C300 + C305 = -$68 + $53 = -$15 At actual jobless claims of 303,000, at contract maturity the C300 call is worth $100 and the C305 call is worthless. Profit = +$100 - $0 - $15 = $85

______ option can only be exercised on the expiration date.

A European

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 3 months. The price of a 3-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. 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?

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

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

CBOE

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 ______ option.

an asian

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

are not, are

At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit?

at the money

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August.

between $44.25 and $55.75

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

bull spread

You are convinced that a stock's price will move by at least 15% over the next 3 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?

buy a strap.

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

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

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

collar

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

contracts that are tailored to meet the needs of market participants

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

conversion value of the bond

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

covered call

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 _________.

decrease, decrease

When issued, most convertible bonds are issued _____________.

deep out of the money

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

digital

A quanto provides its holder with the right to ______________.

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

If the gross profit is positive and the net profit is negative, you will _________.

exercise the option

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 __________.

greater, greater

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 _________.

in the money

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

in the money

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

long call and short put

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 _________.

long straddle

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.

max (0, X - ST)

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.

min (P0, ST - X + P0)

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

money spread

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

more; European-

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

protective put

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

protective put

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

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

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

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

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

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

A time spread may be executed by _____.

selling an option with one expiration date and buying a similar option with a different expiration date

If you anticipatea dramatic decline in stock prices, which naked strategy will make you the most profit?

short call

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

short call and short put

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

short call and 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 _______.

short put

Strips and straps are variations of __________.

straddles

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

third Friday

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

time spread

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

unlimited