Chapter 15
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 the expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________. A) $120 B) $400 C) $600 D) $1,850
A) $120 Explanation: Profit = 100[(79 - 75)] - 8.50 + 6] = $150
You purchase 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. A) $300 profit B) $200 loss C) $600 loss D) $200 profit
A) $300 profit Explanation: Short call profit = Min [0, ($120 - $121)(100)] + $400 = $300
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. A) II only B) II and IV only C) I, II, and III only D) I, II, III, and IV
A) II only
The writer of a call option _______. A) agrees to sell shares at a set price if the option holder desires B) agrees to buy shares at a set price if the option holder desires C) has the right to buy shares at a set price D) has the right to sell shares at a set price
A) agrees to sell shares at a set price if the option holder desires
At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit? A) at the money B) in the money C) out of the money D) knocked in
A) at the money
The maximum loss a buyer of a stock call option can suffer is the _________. A) call premium B) stock price C) stock price minus the value of the call D) strike price minus the stock price
A) call premium
What strategy is designed to ensure a value within the bounds of two different stock prices? A) collar B) covered Call C) protective put D) straddle
A) collar
You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A) covered call B) long straddle C) naked call D) money spread
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 _________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
A) decrease; decrease
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. A) max (-C0, ST - X - C0) B) min (-C0, ST - X - C0) C) max (C0, ST - X + C0) D) max (0, ST - X - C0)
A) 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. A) max (0, ST - X) B) min (0, ST - X) C) max (0, X - ST) D) min (0, X - ST)
A) max (0, ST - X)
All else the same, an American-style option will be ______ valuable than a ______ style option. A) more; European- B) less; European- C) more; Canadian- D) less; Canadian-
A) more; European-
Strips and straps are variations of __________. A) straddles B) collars C) money spreads D) time spreads
A) straddles
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 _________. A) time spread B) long straddle C) short straddle D) money spread
A) time spread
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. A) $200 profit B) $200 loss C) $300 profit D) $300 loss
B) $200 loss Explanation: Long call profit = Max [0, ($123 - $120)(100)] - $5(100) = -$200 Difficulty: 2 Medium
You purchase one MBI July 120 call 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. A) $300 profit B) $300 loss C) $500 loss D) $200 profit
B) $300 loss Explanation: Long put profit = Max [0, ($120 - $123)(100)] - $300 = -$300
Longer-term American-style options with maturities of up to 3 years are called __________. A) warrants B) LEAPS C) GICs D) CATs
B) LEAPS
A European call option gives the buyer the right to __________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price at the expiration date
B) buy the underlying asset at the exercise price only at the expiration date
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 _________. A) at the money B) in the money C) out of the money D) knocked in
B) 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 _________. A) at the money B) in the money C) out of the money D) knocked out
B) in the money
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 _________. A) time spreads B) long straddle C) short straddle D) money spreads
B) long straddle
What strategy could be considered insurance for an investment in a portfolio of stocks? A) covered call B) protective put C) short put D) straddle
B) protective put
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 _______. A) $120 B) $1,000 C) $11,000 D) $12,000
C) $11,000 Explanation: Profit = 100(120 - 10) = 11,000
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 __________. A) $125 B) $450 C) $575 D) unlimited
C) $575 Explanation: Loss = 100(1.25 + 4.50) = 575 if stock price is $50 at expiration.
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. A) II, III, and IV only B) I, III, and IV only C) I, II, and III only D) I, II, III, and IV
C) I, II, and III only
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. A) max (P0, X - ST - P0) B) min (-P0, X - ST - P0) C) min (P0, ST - X + C0) D) max (0, ST - X - P0)
C) min (P0, ST - X + C0)
You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A) long straddle B) naked put C) protective put D) short stroll
C) protective put
An American put option gives its holder the right to _________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price at the expiration date
C) sell the underlying asset at the exercise price on or before the expiration date
______ option can only be exercised on the expiration date. A) A Mexican B) An Asian C) An American D) A European
D) A European
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 ________. A) time spread B) long straddle C) short straddle D) money spread
D) money spread
A European put option gives its holder the right to ________. A) buy the underlying asset at the exercise price on or before the expiration date B) buy the underlying asset at the exercise price only at the expiration date C) sell the underlying asset at the exercise price on or before the expiration date D) sell the underlying asset at the exercise price at the expiration date
D) sell the underlying asset at the exercise price at the expiration date
Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A) long call and short put B) long call and long put C) short call and short put D) short call and long put
D) short call and long put
