Option Contracts

The contract size for equity mini-options is A10 shares of the underlying stock. B25 shares of the underlying stock. C50 shares of the underlying stock. D100 shares of the underlying stock.

A10 shares of the underlying stock.

How often can an investor purchase the maximum number of option contracts? A5 business days B7 business days C30 calendar days D9 months

A5 business days

Your customer writes an OEX 250 put for 2.50 when the S & P 100 is at 252. What is the maximum loss? A$250 B$24,750 C$25,000 D$25,200

B$24,750 The maximum loss is the strike price of 250 minus 2.50 X 10000 = 24,750.

Your customer writes an S & P 100 (OEX) May 320 put for .50. With the OEX at 340, what is her maximum gain? A$34 B$50 C$510 D$515

B$50 When you write a put, your maximum gain is the premium you received - $50 or .50 point X 100.

What is the premium multiplier for mini-option contracts? A1 B10 C50 D100

B10 The premium multiplier is 10. A mini-option contract with a premium of $2 would cost $20 ($2 x 10).

A registered representative wants to increase his sales and decides to increase his option business. He sends a letter to all of his customers discussing covered call writing, but he makes no specific recommendations. When must the OCC Disclosure Statement be delivered? AWithin 15 days after the account has been approved for option writing BAt or prior to the time the client receives the letter CAt or prior to the opening of the account DAt or prior to account approval

BAt or prior to the time the client receives the letter The options disclosure document must be sent prior to or upon sales literature being sent.

An investor has a portfolio of stocks that has appreciated from an original value of $38,000 to a current value of $44,000. The portfolio has a beta factor of 1.00. If the investor wishes to hedge the portfolio through the use of OEX SEP 220 options, the investor should ABuy 1 put. BBuy 2 puts. CWrite 1 call. DWrite 2 calls.

BBuy 2 puts. The best way to hedge a portfolio of stocks is to purchase a put option. Since the investor wishes the use OEX 220's and since each option has a multiplier of 100, the market value of the OEX 220 is 100 X 220, or $22,000. Hedging a portfolio of $44,000 would require two puts.

A U.S. corporation imports goods from Switzerland. Which of the following option positions should it choose to best protect itself? ASell Swiss franc BBuy Swiss franc calls CBuy Swiss francs puts DSell Swiss franc calls

BBuy Swiss franc calls Remember that "importers buy calls." An easy way to remember this is EPIC: Exporters buy Puts, Importers buy Calls.

A customer who is long a call may have the following benefits, EXCEPT AHedge a short sale of the stock. BDiminishing time. CProfit from an increase in the price of the underlying stock. DPostpone a purchase decision on the underlying stock.

BDiminishing time. Long a call can benefit from all except diminishing time because that is a disadvantage to long options positions. Long positions need time for the stock to be able to move in their favor in order for them to benefit.

If the market price of the underlying securities remains the same, which two of the following investors would realize a loss? I. Buyer of an at-the-money put; II. Seller of an at-the-money put; III. Buyer of a straddle; IV. Seller of a straddle AII and IV BI and III CI and IV DII and III

BI and III For buyers of options, low volatility and the passing of time erode option premiums. An at-the-money put has no intrinsic value, so if the stock remains at or near the strike price, the premium will erode. At expiration, if it is at the money, it will expire worthless. Straddle holders need large moves in the underlying stock to make a profit, because they paid two premiums for the straddle. Review ContentNext Question

If you anticipate interest rates to decline, you would recommend a I. T-Bond yield call. II. T-Bond yield put. III. T-Bond call. IV. T-Bond put. AI and IV BII and III CII and IV DI and III

BII and III Rates declining would favor a T-Bond yield put, which follows declining yields and a T-Bond call, which appreciates along with bond prices.

Which of the following is the most widely used index for option contracts? AS & P 500 BS & P 100 CNational OTC DMajor market

BS & P 100

A company is building a plant in Japan using Japanese labor. The company will pay the labor force in Japanese yen in approximately 3 months. The company believes the dollar will decline against the yen. In order to best protect itself, what option position should the company choose? ASell a Japanese yen call BBuy a Japanese yen put CBuy a Japanese yen call DSell a Japanese yen put

CBuy a Japanese yen call If the U.S. company wishes to protect its payroll, it would buy Japanese yen calls to hedge against the currency.

The manager of a bond fund has used the strategy of writing covered T-bond calls as a means of increasing the fund's yield. Distributions to shareholders from this source of income will be treated, for tax purposes, as AInterest and capital gains. BOrdinary income. CCapital gains. DInterest.

CCapital gains. Any income derived from writing options is considered to be capital gain. Therefore, any distributions (Remember: a regulated investment company distributes at least 98% of its net capital gains.) would be considered to be capital gains to the shareholder of the fund. However, interest received on the bonds in the portfolio would be distributed (after expenses) to the shareholder in the form of dividends, taxed as ordinary income.

The options position with the most risk is AUncovered put. BLong call. CUncovered call. DLong put.

CUncovered call. Short calls have unlimited risk. Naked or uncovered calls are short calls.

XYZ stock has a market price of $62. Your client writes an XYZ Sept 60 call for $5. A month later, XYZ stock has a market price of $68 and your client makes a closing purchase of the XYZ Sept 60 call at $10. What is his gain or loss? A$500 loss B$100 gain C$700 gain D$200 loss

A$500 loss He wrote/sold the call for $500 (credit) and made a closing purchase for $1,000 (debit), for a loss of $500.

What is the cost of a March 120 T-Bond call with a premium of .20? A$625 B$1,000 C$2,000 D$6,250

A$625 Treasury notes and bonds are quoted in 32nds. Therefore, .20 = 20/32 (.625) of 1% of $100,000 (1 point) or $625.

Your client has a portfolio of Treasury bonds. You are concerned about a rise in interest rates. Which of the following would you recommend? ABuy T-Bond puts BSell T-Bond calls CSell T-Bond puts DBuy T-Bond calls

ABuy T-Bond puts A rise in interest rates would cause bond values to fall. Therefore, a hedge would involve buying puts on long bond positions.

A customer has been approved for a margin account. The customer wishes to sell options. The first trade can occur AToday. BWithin 15 days. CNext day. DFifth business day.

AToday. The customer may immediately trade once his margin account is approved.

Which TWO of the following positions are bullish? I. Long calls II. Short calls III. Long puts IV. Short puts AI and III BI and IV CII and III DII and IV

BI and IV Long calls and short puts are both bullish positions. If the underlying security goes higher, calls will increase in value and puts will go down in value. If call holders exercise their calls, they will be long stock. If put writers are assigned, they will be long stock.

A customer writes an XYZ Dec 15 put for $2. At expiration the market price of XYZ is $12 and the put is exercised and the customer immediately sells 100 shares at $12. What is gain or loss? AProfit of $100 BLoss of $100 CProfit of $200 DLoss of $200

BLoss of $100 The market price of XYZ is $12. The put was exercised and the customer has to buy 100 shares of stock at $15 (debit) that was sold for $12 (credit), so $300 was lost on the stock. However, the premium of $200 (credit) was received when the put was written, so the loss is $100.

If a call holder chooses to exercise the call, the writer must AGive notice to the OCC. BSell 100 shares of the underlying security at the strike price. CBuy 100 shares of the underlying security at the strike price. DAssign a call.

BSell 100 shares of the underlying security at the strike price. Call holders have the right to buy. Therefore, the writer of the call option would be obligated to sell 100 shares at the strike price if the contract was exercised.

A mutual fund portfolio manager expects interest rates to increase. He wishes to protect his Treasury bond portfolio but also wishes to generate some additional income. What would be the most appropriate action for the portfolio manager to take? ASell T-bond puts BSell T-bond calls CBuy T-bond puts DBuy T-bond calls

BSell T-bond calls Because the manager wishes to generate income and have the income protect against temporary declines in bond prices, he should sell calls, not buy puts.

Sell a 15 put for 2. What is the maximum loss? A$200 B$500 C$1,300 D$1,500

C$1,300 Premium is -2, and market is -15 = -13 X 100 = $1,300. Strike price 15 minus - 2 premium received = 13 X 100 = $1,300

XYZ stock has a market price of $55 per share. John thinks the price of XYZ stock is going to remain stable over the next 3 months, so he decides to write 10 XYZ July 55 calls @ 3. What is the maximum gain? A$300 B$1,000 C$3,000 DUnlimited

C$3,000 The maximum gain in writing/selling options is the premium received.

The strike price and premium of Treasury bond options are stated as a percentage of the AAccrued interest. BCurrent market value of the underlying bonds. CFace amount of the underlying bonds. DAggregate call premium.

CFace amount of the underlying bonds. The par value, or face amount of T-bonds, is basis for bond and option quotes.

Triple witching involves the expiration of which of the following four times a year? I. Equities; II. Equity options; III. Equity option indexes; IV. LEAPs AI and II BI and IV CII and III DII and IV

CII and III Equities don't expire; therefore, any choices containing "I" are incorrect. "Triple witching" is the expiration of options on equities, equity indexes, and equity index futures, but futures are for another test; not covered here on the Series 7.

A put contract is I. Right to buy at a strike price. II. Right to sell at a strike price. III. Obligation to buy at a strike price. IV. Obligation to sell at a strike price. AI and II BI and III CII and III DIII and IV

CII and III Long put - right to sell. Short put - obligation to buy.

If XYZ stock is trading at 27.50, which of the following options are in-the-money? I. XYZ July 30 call II. XYZ July 25 call III. XYZ August 30 put IV. XYZ August 25 put AI and III BI and IV CII and III DII and IV

CII and III The July 25 call is in the money by 2.50, and the August 30 put is in-the-money by 2.50.

The holder of a call option on a T-bond will profit under all of the following circumstances, EXCEPT I. Yields on T-bonds decrease. II. Yields on T-bonds increase. III. Prices of T-bonds decrease. IV. Prices of T-bonds increase. AI and III BI and IV CII and III DII and IV

CII and III The buyer or holder of a call will profit, EXCEPT when yields increase and prices decrease. Under this circumstance the holder will lose.

In an effort to maintain orderliness when taking option orders and transactions, the specialist/order book official uses a/an AIntrinsic value method. BRandom selection process. CTrading rotation. DFirst come/first serve rule (FIFO).

CTrading rotation. The specialist/order book official always starts the taking of orders, in the series of options assigned to him, with an opening rotation. When the market closes, the system implemented to take orders is the closing rotation.

Bob is short 20 DEF April 70 puts. Bob enters an order to buy 10 DEF April 70 puts. This order is AA closing sell order. BAn opening buy order. CAn opening sell order. DA closing buy order.

DA closing buy order. This is a closing buy order. Bob is reducing an existing options position.

You buy/hold an ABC Sept 50 put. Which of the following would create a straddle? ASell ABC Sept 50 call BBuy ABC Sept 40 call CSell ABC Sept 60 call DBuy ABC Sept 50 call

DBuy ABC Sept 50 call A straddle is either buying or selling a call and put on the same underlying security, with the same strike price and expiration date. You buy/hold an ABC Sept 50 put, so to create a straddle, you buy/hold an ABC Sept 50 call.

A domestic company is exporting goods to Europe. Which of the following option strategies would it use? ASell euro puts BBuy euro calls Csell euro calls DBuy euro puts

DBuy euro puts The U.S. exporter would buy puts. An easy way to remember this is EPIC, meaning Exporters buy Puts, Importers buy Calls.

An option trader sells 1 ABC Apr 50 put for 1 and buys 1 ABC Apr 60 put for 8 with the market in ABC at 54. The trader will profit if I. Both options expire unexercised. II. Both options are exercised. III. The difference in premiums widens to more than 7 points. IV. The difference in premiums narrows to less than 7 points. AII or IV BI or III CI or IV DII or III

DII or III The position of debit will profit if options are exercised and premiums widen.

Sarah wrote/sold the following straddle: 1 XYZ Oct 20 put for 5 and 1 XYZ Oct 20 call for 3. At October expiration, XYZ stock is at 29. The Oct 20 put expires and the Oct 20 call is exercised with XYZ at 29. Sarah buys stock at $29 and closes her position. What is the profit or loss? AProfit $400 BLoss $400 CProfit $100 DLoss $100

DLoss $100 Total premium received is $800. The put expires. The call breakeven is 28. The stock 29 and Sarah has to buy stock at 29 and sell it for 20; a 9 point loss. Therefore, there is a loss of $100.

Which describes what happens to outstanding option contracts when exchange trading of the underlying stock is interrupted? AOnly closing orders can be executed. BOptions are canceled. COnly closing orders can be placed. DOptions are halted if the stock is halted.

DOptions are halted if the stock is halted. Stock halts are honored by options exchanges on equity options (but not on index options).

A customer buys an 8 1/2% T-bond maturing in 2015. He also buys a T-bond put. Interest rates appreciate to 10%. Which of the following will occur upon sale of the bond and exercise of the put? APosition will be closed without gain or loss. BBond yields will rise for a gain. CPut will be exercised for a gain. DPosition will be closed for a loss.

DPosition will be closed for a loss. If you buy a T-bond and a T-bond put, then interest rates rise; you cut your losses in bond price by exercise. Your loss becomes mostly premium.

A customer has a portfolio of Treasury securities. In order to increase investment income, ABuy calls. BWrite puts. CBuy puts. DWrite calls.

DWrite calls. If an investor is long Treasury securities, writing T-Bond calls would increase income through receiving premiums.