14.3 & 14.4

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

D

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 A) I and II only B) I, II and III only C) II, III and IV only D) I, II, III and IV

D

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

TRUE

The option premium is the price of the option.

TRUE

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. C) the strike price of the put is greater than the time premium of the put. D) the strike price of the put is less than the market value of the underlying asset.

B

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. A) $15 B) $16 C) $14 D) cannot be determined from the information provided

C

A naked option is a conservative investment with limited risk.

FALSE

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

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.

TRUE

One of the primary advantages of options is the leverage they provide.

TRUE

Option writing can be very profitable because the majority of options are never exercised.

TRUE

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

TRUE

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 C) only III D) II and IV

B

NZMA stock is currently selling for $128. Which of the following options is "in-the-money"? A) March 130 call B) February 125 call C) March 125 put D) February 100 put

B

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 C) II and III only D) II and IV only

B

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 C) II and III only D) II and IV only

B

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 C) sale of a put D) purchase of a put

B

Which one of the following options is more expensive? Show all calculations. (a) A six-month put that carries a $40 strike price on a stock that is currently trading at $35.84, given that the put trades at a 15 percent investment premium; or (b) A six-month call that carries a $50 strike price on a stock that currently trades at $54.75, while the call trades with a 12 percent investment premium?

(a) Value of put = ($40.00 - $35.84) = $4.16 Price of put = [{(0.15)($4.16)} + $4.16] [100] = $478.40 (b) Value of call = ($54.75 - $50.00) = $4.75 Price of call = [{(0.12)($4.75)} + $4.75] [100] = $532.00 Therefore, the call is more expensive.

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 C) $500 D) $600

A

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. C) speculate on a downward drop in a general market index. D) speculate on an upward movement in a given currency.

A

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 B) $24.00 C) $25.00 D) $26.50

A

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 C) $500, $125 D) $275, $125

A

One of the major disadvantages of options is A) their lifespan. B) their cost. C) their lack of liquidity. D) the risk to option buyers.

A

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% C) 250% D) 300%

A

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 C) write a call D) write a put

A

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 C) $300 D) $400

A

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 C) III and IV only D) II and III only

A

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. A) buy a call B) write a put C) buy a put D) sell a put

C

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. A) $22 B) $25 C) $28 D) cannot be determined from the information provided

C

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? A) $100 B) $350 C) $3,250 D) Her profit potential is unlimited.

C

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 A) $200. B) $240. C) $2,640. D) $3,000.

C

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

C

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 C) $8 D) cannot be determined from the information provided

B

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? A) $150 B) $100 C) $0.00 D) -$100

C

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 A) I, II, IV and VI only B) I, II and III only C) I, II, III, IV and VI only D) I, II, III, IV, V and VI

C

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 A) 600 call options with a strike price of $55. B) 600 put options with a strike price of $50. C) 6 call options with a strike price of $55. D) 6 put options with a strike price of $50.

D

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 A) II and IV only B) I and III only C) III and IV only D) I, III and IV only

D

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."

FALSE

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

FALSE

If you expect the price of a security to decline, you could buy a call to protect your financial position.

FALSE

Investors buy options at the bid price and sell at the ask price.

FALSE

The buyer of a put and the writer of the a both profit if the price of the stock falls.

FALSE

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

FALSE

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

FALSE

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

FALSE

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. A) I and IV only B) II and III only C) II and IV only D) II, III and IV only

C

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

TRUE

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

TRUE

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

TRUE

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

TRUE