SIE:Unit 3

The maximum loss on a short put is

strike price - premium.

Your customer is long 1 October 55 put at 4. The customer's maximum loss potential is

For long option contracts (puts or calls), the maximum loss is always the premium initially paid—in this case, 4 points ($400). This happens if the price of the underlying is at or above the put strike price at the option's expiration—in other words, at, or out of the money.

Regarding options positions, which of the following statements is true?

Buyers of options have rights, and writers (sellers) of options may be in an obligatory positon if the buyer exercises the contract. Call buyers have the right to purchase stock, and put buyers have the right to sell stock. Call writers may be obligated to sell the stock, while put writers may be obligated to buy the stock.

A customer recently approved to trade options buys a put contract for the account's initial transaction. If the customer fails to return the signed option agreement within 15 days of account approval, which of the following transactions is the customer permitted to make?

Closing sale

Of the following strategies, which is considered most risky in a strong bull market?

Short (writing) calls are bearish and have an unlimited maximum loss potential. In wanting the stock to go down, one's risk is that the underlying stock goes up and, in theory, could go as high as infinity.

An investor buys 1 DWQ May 70 call at 2, giving the investor the right to buy 100 shares of DWQ at $70 per share. All the specifications of the transaction are set or standardized by the Options Clearing Corporation (OCC) except

The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market. LO 3.k

Which of the following option positions would offer a full hedge to a short stock position?

The best way to hedge a short stock position is with a long call.

An investor purchases 1 KLP October 95 put at 6.50. What is the investor's maximum potential gain with this position?

The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). Because one contract represents 100 shares, the owner's maximum gain is $8,850 and would occur if the stock falls to zero. Remember, put buyers are bearish; therefore, they will make money if the stock falls below the breakeven point—in this case, below 88.50.

The maximum loss on a long put is

The maximum loss on any long option is the amount that was paid for the option (premium).

An investor owns one NMS June 40 call trading at 5. If the underlying value of NMS stock is 45, the contract is trading

This call contract is in the money by 5 points (45 - 40). It therefore has intrinsic value of 5 points. When a contracts premium (5) equals its intrinsic value (5), it is trading right at parity.