Series 7 Unit 10

On December 13, an investor buys six ABC Feb 60 calls at 2.25 each, when ABC is trading at 59.50 per share. If the calls expire unexercised, how much money will the investor lose?

$1,350 (Buyers of options lose premiums if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium (2.25). This investor's maximum loss is $1,350)

Your client sells one naked MAV Oct 40 call at 2 when the market price of MAV is $41. What must MAV be selling at for the client to break even?

$42 (The breakeven point for a call is the strike price plus the premium (call up). The breakeven point is the same for both the buyer and the writer)

A customer is short a DMF 50 call for which he received a premium of 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the Internal Revenue Code, what were the proceeds of his sale?

$5,400

On November 4, a customer writes an S&P 100 Jan 785 put at 6. The maximum potential gain on this position is

$600

If an investor buys one KLP Oct 95 put at 6.50, what is the investor's maximum potential gain?

$8,850 (The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). One contract represents 100 shares, so the buyer's maximum gain is $8,850 if the stock declines to zero. Because put buyers are bearish, they will make money if the stock falls below the breakeven point of 88.50)

A customer establishes the following positions: Buy 100 ABC for 63 Write 1 ABC Jan 70 call for 1 What is the customer's maximum gain?

$800 (Maximum gain on the covered call position occurs when the stock's market value rises. The short call is exercised when the stock is above 70, so the stock bought for 63 will be sold for 70—a profit of $7 per share. In addition, the customer receives the premium of $1, so the total profit is $800 ($700 + $100)

If an investor sold two BCD Feb 40 calls at 4 on August 4, 2018, and the call expired unexercised, what were the tax consequences?

$800 short-term capital gain for tax year 2019

A customer establishes the following positions: Buy 100 ABC at 28 Buy 1 ABC Dec 25 put at 2 What is the breakeven point?

30 (The breakeven point is where an investor neither makes nor loses money. In this hedged position, the buyer must recover the cost of the stock and the premium paid to break even (28 + 2 = 30). Please note that the call up and put down rule does not apply when there is a stock position)

An investor owns six RIF Apr 150 puts. How many shares of the RIF will change hands if all the options are exercised?

600 (Each of the six contracts allows the owner to sell (put) 100 shares of the RIF stock at $150 per share. If all six contracts are exercised, that will be 6 × 100 = 600 shares)

A customer wrote 10 KLM Jun 80 calls for a premium of 4.75 at a time when the market value of KLM was 81.75. What is his gain or loss if he now closes out his positions at 2.12?

A $2,630 gain (If the customer sold at 4.75 and purchased at 2.12, he nets 2.63, which is multiplied by 100 to yield a $263 gain per contract: 10 × $263 = $2,630 total gain)

Which of the following would be considered a bullish strategy? A) A debit put spread B) Writing a put C) Writing a call D) A credit call spread

B) Writing a put

All of the following option contracts are in-the-money when XYZ is 54 except A) long XYZ 50 call. B) short XYZ 50 put. C) short XYZ 45 call. D) long XYZ 60 put.

B) short XYZ 50 put

An investor purchases 100 shares of JKL common stock at a price of $42 per share on April 22, 2018. On June 27, 2019, JKL's market price is $51 and the investor liquidates the position. Which of the following transactions made on October 17, 2018, would have an effect on the investor's tax treatment of this gain?

Buying a Feb 45 JKL put

If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk?

Buying five puts on the stock

Which of the following would be considered a bearish strategy? A) Writing a put B) A credit put spread C) Writing a call D) A debit call spread

C) Writing a call

In a strong bull market, which of the following positions utilizing leverage has the potential for the highest percentage gain?

Holding calls

A customer believes ABC's stock price will rise, but she does not currently have the money to buy 100 shares. How could the customer use options to profit from a rise in the stock's price? I. Buy calls II. Write calls III. Buy puts IV. Write puts

I. Buy calls IV. Write Puts

Which of the following positions subject an investor to unlimited risk? I. Short naked call II. Short naked put III. Long put IV. Short sale of stock

I. Short naked call IV. Short sale of stock

If TCB is trading at 43 and the TCB Apr 40 call is trading at 4, what are the intrinsic value and the time value of the call premium?

Intrinsic value: 3; time value: 1

Which of the following is a bull spread?

Long Jul 30 put, short Jul 35 put

In the trading of options, there are a number of different multiple option strategies. An investor has the following position: Buy one RIF Apr 120 call Buy one RIF Jul 130 put Which strategy is the investor using?

Long combination (A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security. A straddle is when the expiration dates and exercise prices are the same. A spread consists of a long and short position in the same options class (two puts or two calls). A spread, diagonal or not, is a long and a short in the same type of option (two calls or two puts). In a time spread, everything is the same except the expiration dates)

Your client's position is long 100 MNO purchased at 90. Which of the following strategies will limit the customer's loss to $700?

Long one MNO 90 call at 4, long one MNO 90 put at 3 (It is the long put in this straddle position that limits the maximum loss on the long stock position. If the MNO stock drops to $0, the customer loses $9,000 on the long stock position but retains the right to sell the stock to someone at $9,000, to prevent loss beyond the premium of $300. The call would expire out of the money, for a total loss of $700)

A stock is trading consistently between $20 and $24. The investor with a long position is neutral on the stock. The goal is to generate income. Which of the following recommendations is most appropriate?

Sell a call

Which of the following would establish a covered put?

Short stock at 40, short put at 35 (A covered put is created when a short stock is combined with a short put. Covered puts are established when the investor is neutral or slightly bearish; therefore, the strike price of the put is less than the cost of the stock sold short. The reason the put writer is covered (protected) is that if the stock's price should decline below 35 and the holder of the option exercises, the stock purchased by the writer is used to cover (replace) the borrowed stock for the short sale at 40)

In a volatile market, which of the following option strategies carries the most risk?

Short straddle

On a single day, a customer purchases 15 TPL Sep 50 puts at 6 and 15 TPL Sep 50 calls at 1. If the price of TPL is $45 per share and the customer has no other security positions, what is this position called?

Straddle

Your customer is interested in buying call options on CDL common stock. The client asks you, "Who issues CDL options?" The proper response is

The Options Clearing Corporation

A customer writes two ABC Jul 15 puts at 2 when ABC is 14. If the contracts are closed at a premium of 4 when ABC is 13, the customer has

a $400 loss

Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC Options Disclosure Document

at the time of or before account approval

A technology fund manager concerned about a downturn in the value of his portfolio would hedge by

buying narrow-based index puts

On exercise of the option, the holder of a long call will realize a profit if the price of the underlying stock

exceeds the exercise price plus the premium paid

When opening an options trading account, a broker-dealer is required by FINRA to

make sure the options agreement is signed and returned to the firm within 15 days of the account being approved

Your clients, an elderly retired couple on a small fixed monthly income, want to write uncovered (naked) calls in their joint account to generate income. For this account, this option strategy would most likely be deemed

not suitable, because it is a speculative strategy with unlimited loss potential

An investor buys two ABC Nov 50 calls, three ABC Dec 45 calls, and one ABC Jan 50 call. The best way to describe the portfolio is that it consists of

six options of the same class

If an investor establishes a call spread, and buys the lower exercise price and sells the higher exercise price at a net debit, he anticipates that

the spread will widen

If a customer writes one uncovered in-the-money put, the maximum loss to the customer is

the strike price minus the premium multiplied by 100 shares