Option Q2
A customer buys 10 ABC Jan 50 Calls @ 4.75 when the market price of ABC is $51 per share. The maximum loss potential is: A $4,750 B $45,125 C $50,000 D unlimited
A $4,750 The best answer is A. If the market stays at 50 or falls, the calls will expire worthless and the premium paid is lost. There are 10 contracts so, $4.75 x 10 contracts x 100 shares in each contract gives a total loss of $4,750.
A customer buys 100 shares of XYZ at $49 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential loss is: A 400 B $500 C $4,400 D unlimited
The best answer is A. $400 The long put gives the stock owner the right to sell at $50. Since he bought the stock at $49, exercising results in a 1 point stock profit. However, the premiums paid of $5 are lost, for a net loss of 4 points or $400 maximum.
A customer sells short 100 shares of PDQ at $47 and sells 1 PDQ Sep 50 Put @ $6. The maximum potential gain while both positions are in place is: A 0 B $300 C $600 D unlimited
The best answer is B. $300 If the market falls, the short put is exercised and the stock must be bought at $50. Since it was already "sold" at $47, there is a loss of $3 per share ($300 total). But the customer collected $600 in premiums; so the end result is a net gain or $300. This is the maximum potential gain. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss
A customer buys 1 ABC Jul 40 Put at $6 when the market price of ABC is $38. The customer's maximum potential gain is: A $600 B $3,400 C $4,000 D unlimited
The best answer is B. $3400 The maximum gain for the holder of a put occurs if the market goes to "0." If it does, the customer can sell the stock at $40 and purchase it for nothing. Since the customer paid $600 in premiums for this right, the maximum potential gain is: $4,000 - $600 = $3,400.
A customer buys 2 ABC Jan 15 Puts @ 2 when the market price of ABC is $14. The maximum potential gain is: A $200 B $1,300 C $2,600 D $3,000
The best answer is C. $2600 The maximum gain for the holder of a put occurs if the market goes to "0." If it does, the customer can sell the stock at $15 and purchase it for nothing. Since the customer paid $200 in premiums for this right, the maximum potential gain is: $1,500 - $200 = $1,300. Since there are 2 contracts, the maximum gain becomes $2,600
An investor sells short 200 shares of ABC stock at $60 and sells 2 ABC Jan 60 Puts @ $4 on the same day in a margin account. The breakeven point is: A $52 B $56 C $64 D $68
The best answer is C. $64 Since the customer received $4 per share in premiums, he or she can afford to lose $4 on the short stock position and still break even. The stock was sold short at $60. If the market rises to $64, the customer can buy back the stock and break even. Note that breakeven point is always computed on a per share basis; the fact that there are 2 contracts does not affect the computation. To summarize, the formula for breakeven for a short stock / short put position is: =Short sale price + premium
An investor sells short 200 shares of ABC stock at $22 and sells 2 ABC Nov 20 Puts @ $1 on the same day in a margin account. The breakeven point is: A $19 B $21 C $22 D $23
The best answer is D. $23 Since the customer received $1 per share in premiums, he or she can afford to lose $1 on the short stock position and still break even. The stock was sold short at $22. If the market rises to $23, the customer can buy back the stock and break even. Note that breakeven point is always computed on a per share basis; the fact that there are 2 contracts does not affect the computation. To summarize, the formula for breakeven for a short stock / short put position is: Short sale price + premium
A customer is long an ABC Jan 60 Put. The position has a profit that the customer wishes to capture. The proper order to enter is a(n): A opening purchase B closing purchase C opening sale D closing sale
The best answer is D. Closing Sale All options orders must be marked either "opening" or "closing." The OCC maintains the record of all listed options contracts. Opening positions are recorded on the books of the OCC; while orders to close positions remove them from the books of the OCC. Note that a customer can open by selling an option contract and will close buy purchasing that option contract; or the customer can open by purchasing an option contract and will close by selling that option contract.
