65 - Unit 16
only those who own options
(are long) can decide to exercise
LEAPS, the acronym for long-term equity anticipation securities, have expiration dates that can run more than
3 years compared with the 9 months for standard option contracts.
Which one of the following option positions would generally command the greatest time value?
LEAPS
George owns XYZ stock. Based on recent analyst projections and George's own research, he believes XYZ's price will remain flat over the next few months. Accordingly, which strategy would George most likely employ?
Sell a call option
Buying a call is
bullish
An investor who is long XYZ stock would consider going long an XYZ call to
protect against an increase in the market price of XYZ stock
Going long a call means
that you have bought it
All of the following are characteristics of a rights offering
the rights are marketable the subscription price is below the current market value it is issued to current stockholders
Writing naked calls provides
unlimited liability and the most risk
If you wish to hedge your long stock position
you buy a put, not a call.
Which type of contract obligates both parties to act?
Forward contract Futures contract
One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing the following risks:
Liquidity Creditworthiness of the buyer
Which of the following is a multi-option strategy?
Straddle
Which of the following is considered a derivative?
Warrant Futures contract Call option
You would buy a call so that
if the price of the stock went up, you could exercise at the lower strike price of your call option.
LEAPS
long-term equity anticipation securities
An owner of a put has the
right, not the obligation, to sell, not purchase, a security at a designated price
An investor wishes to be able to obtain the right, but not the obligation, to purchase 100 shares of KAPCO common stock at $50 per share for the next 6 months. KAPCO is currently selling for $52 per share. This investor's wishes could be met by
the purchase of a call option
Specified in an exchange-traded futures contract would be
the quantity of the underlying asset the quality of the underlying asset the time of delivery of the underlying asset the location of delivery of the underlying asset
The long party to a put option contract has
the right to sell the underlying asset.
The long party is a futures contract that has entered the contract as
a buyer.
A straddle consists of
a put and a call on the same stock with the same strike price and the same expiration date. If the investor has purchased both options
An investor will likely exercise a put option when the price of the stock is
below the strike price.
A commodities speculator purchases a 1,000 bushel wheat futures contract at 50 cents per bushel. At expiration, the settlement price is 45 cents per bushel. This individual
has a $50 loss
A client calls to say he has just read about a European option and doesn't know what it is. You would explain that it is a derivative because
its value is based on some underlying asset
Call options are issued by the
options exchanges, not the underlying corporation.
Covered call writing is a strategy where an investor
sells a call on a security he owns to reduce the volatility of the stock's returns and to generate income with the premium
A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably
take a long position in corn futures
News reports indicate that the wheat crop scheduled to be harvested in 3 months will be much larger than normal. To hedge, a wheat farmer would most likely
take a short position in wheat futures.
An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires,
both the buyer and the seller are obligated to perform
Long is the industry term describing the
buyer of a futures contract
a European option
can only be exercised on its expiration date
A covered call is simply defined as an
investor owning 100 shares of the underlying stock for each option written (sold).
Among the ways in which futures differ from options is that both parties, long and short, are
obligated to execute the contract
When contrasting call options, preemptive rights, and warrants, it would be correct to state
only preemptive rights and warrants are issued by the underlying corporation.
Being long a put option means
owning the option
Buying a put option on a security he holds allows an investor to
participate in additional gains if the security continues to increase in price
the following statements regarding futures contracts are correct
purchasing a contract for future delivery is considered taking a long position. futures contracts can be written on financial assets or commodities. a short position will increase in value if the underlying commodity or asset declines in value.
In May, an investor purchased a futures contract to purchase 5,000 bushels of wheat at $4.30 per bushel for December delivery. On settlement date, the spot price of wheat is $4.20 per bushel. For the investor, this
represents a loss of $500
