OPTIONS: QUIZ

Under O.C.C. rules, the maximum "legal" life of a regular stock option contracts is: A. 3 months B. 6 months C. 9 months D. 12 months

C. 9 months

A customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The maximum potential gain is: A. $3,300 B. $3,500 C. $4,200 D. unlimited

A. $3,300 The best answer is A. If the stock falls, the customer gains on the short stock position. The customer sold the stock for $38. If it falls to "0," the customer can buy the shares for "nothing" to replace the borrowed shares sold and make 38 points. The customer lets the call expire "out the money" losing 5 points, so the maximum potential gain is 33 points = $3,300.

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 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 ABC at $71 and buys 1 ABC Jan 75 Put @ $8. ABC goes to $61 and the customer exercises the put. The customer's loss is: A. $400 B. $800 C. $1,200 D. $1,800

A. $400 The customer buys the stock at $71 and sells it for $75 by exercising the put for a $4 gain. She paid $8 per share in premiums for the put contract, so the net loss is $4 points.

A customer buys 100 shares of ABC stock at $49 and sells 1 ABC Jan 50 Call @ $4. The breakeven point is: A. $45 B. $46 C. $53 D. $54

A. $45 49-4=45 SHORT COST - PREMIUM = LONG STOCK/SHORT CALL BREAKEVEN

A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The maximum potential gain while both positions are in place is: A. $500 B. $600 C.$700 D. unlimited

A. $500

A customer buys 200 shares of GE at 72 and sells 2 GE Jun 70 Calls @ $6. The maximum potential gain is: A. $800 B. $1,200 C. $7,000 D. unlimited

A. $800 If the market rises, the calls are exercised. The stock (which cost $72) must be delivered at $70 for a loss of $2 per share. Since $6 was collected in premiums for selling the call, the net gain, if exercised, is 4 points or $400 per contract x 2 contracts = $800.

A customer sells short 100 shares of ABC stock at $80 per share. The stock falls to $70, at which point the customer writes 1 ABC Sept 70 Put at $4. The stock falls to $62 and the put is exercised. The customer has a gain per share of: A. 14 points B. 16 points C. 18 points D. 24 points

A. 14 points The customer sold the stock short at $80 per share (sale proceeds). Later, the customer sold a Sept 70 Put @ $4 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $70 per share. Since the customer received $4 in premium when the put was sold, the net cost to the customer is $66 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is: $80 sale proceeds - $66 cost basis = 14 points.

A customer has a large portfolio of diversified blue chip stocks and would like to increase the income from the investments. Which of the following strategies are suitable? A. Covered call writing B. Naked call writing C. Covered put writing D. Naked put writing

A. Covered call writing

The last time to trade expiring equity options is: I. 4:00 PM EST II. 11:59 PM EST III. On the third Friday of the month IV. on the Saturday following the third Friday of the month A. I and III B. I and IV C. II and III D. II and IV

A. I and III

A customer buys 100 shares of ABC at $50 and buys 1 ABC Jan 50 Put @ $5. This position results in a profit when the market: I. rises II. Falls III. is stable A. I only B. II only C. I and III D. II and III

A. I only

An investor purchases 1 ABC Jan 45 Call @ $3. The investor subsequently exercises his option contract. The holder has the right to: A. buy stock at $45 per share B. buy stock at $48 per share C. sell stock at $45 per share D. sell stock at $48 per share

A. buy stock at $45 per share The holder of a call has the right to buy stock at the strike price of $45 per share specified in the contract. For the contract, the holder initially pays a premium of $3 per share.

The exercise of an SPX (S&P 500 Index) option will result in the delivery of: A. cash the next business day B. cash in 2 business days C. SPDRs the next business day D. SPDRs in 2 business days

A. cash the next business day

A customer purchases an equity option contract at 1:00 PM Eastern Standard Time on Tuesday, October 10th in a cash trade. If the customer wishes to exercise, the customer may place an exercise notice with the Options Clearing Corporation: A. immediately B. no earlier than 10:00 AM Eastern Standard Time, the next business day C. no earlier than 10:00 AM Eastern Standard Time, on the 3rd business day following trade date D. no earlier than the Friday immediately preceding the third Saturday of the expiration month

A. immediately

A put is assigned prior to the ex date for a cash dividend. The customer: A. will receive the dividend B. will not receive the dividend C. must pay the dividend D. is not required to pay the dividend

A. will receive the dividend

A customer sells short 100 shares of ABC stock at $60 and sells 1 ABC Oct 60 Put @ $6. The market rises to $68 and the put expires. The customer buys the stock in the market covering his short stock position. The gain or loss is: A. $200 gain B. $200 loss C. $600 gain D. $600 loss

B. $200 loss If the market rises, the short put expires. Here, the customer buys the stock at $68 to cover his short stock position that was originally sold at $60. There is an 8 point or $800 loss, that is partially offset by the $600 in premiums received. Thus, there is a net loss of $200.

A customer buys 1 ABC Jul 40 Put at $6 when the market price of ABC is $38. The breakeven point is: A. $32 B. $34 C. $44 D. $46

B. $34 40-6=34 STRIKE PRICE - PREMIUM = LONG PUT BREAKEVEN

A customer buys 1 ABC Jul 45 Put at $4 when the market price of ABC is $46. The customer's maximum potential gain is: A. $400 B. $4,100 C. $4,900 D. Unlimited

B. $4,100 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 $45 and purchase it for nothing. Since the customer paid $400 in premiums for this right, the maximum potential gain is: $4,500 - $400 = $4,100

On the same day in a margin account, a customer sells short 100 shares of ABC at $46 and buys 1 ABC Jan 45 Call @ $2.50. The customer will break even at: A. $20.50 per share B. $43.50 per share C. $47.50 per share D. $48.50 per share

B. $43.50 per share 46-2.50 = 43.50 SHORT SALE PRICE - PREMIUM = SHORT STOCK/LONG CALL BREAKEVEN

A customer sells short 100 shares of ABC stock at 40 and buys 1 ABC Mar 40 Call @ $5. The stock rises to $80 and the customer exercises the call. The gain or loss is: A. $500 gain B. $500 loss C. $3,500 gain D. $3,500 loss

B. $500 loss If the market rises, the customer can exercise the call and buy the stock at $40. These shares can be used to replace the "borrowed" shares sold short at $40. On the stock, there is no gain or loss. However, the customer loses the $500 paid in premiums.

A customer sells 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. The breakeven point is: A. $52 B. $56 C. $64 D. $68

B. $56 60-4=56 STRIKE PRICE - PREMIUM = SHORT PUT BREAKEVEN

Which statements are TRUE about option contracts? I. Calls go "in the money" when the market price rises above the strike price II. Calls go "in the money" when the market price falls below the strike price III. Puts go "in the money" when the market price rises above the strike price IV. Puts go "in the money" when the market price falls below the strike price A. I and III B. I and IV C. II and III D. II and IV

B. I and IV

If an opening trade of an option contract occurs on the Chicago Board Options Exchange, the issuer of the contract is the: A. Chicago Board Options Exchange B. Options Clearing Corporation C. Securities Exchange Commission D. Registered Options Trader

B. Options Clearing Corporation

A Customer owns a 5 ABC convertible bonds, convertible into common stock at a 20:1 ratio. The common stock is currently trading at $29. The customer believes that the stock will rise during the next 6 months, but does not think that it will rise above $45 per share. The customer wishes to use options to profit from his belief, but wishes to minimize any additional capital outlay. Which strategy is the best recommendation to the customer? A. Buy 1 ABC Jan 45 Call B. Sell 1 ABC Jan 45 Call C. Buy 1 ABC Jan 45 Put D. Sell 1 ABC Jan 45 Put

B. Sell 1 ABC Jan 45 Call This customer believes that the stock will rise from its current price of $29, but will not rise above $45 per share. As the holder of a convertible bond, convertible at $50 per share, it would not make sense to convert, even if the price rose to $45. However, the customer can use the convertible bond to "cover" the sale of call contracts against the stock. Since each bond is convertible at 20:1, 5 bonds is the equivalent of 100 shares of stock. By selling an ABC Jan 45 Call, the customer collects the premium income, and has no capital outlay since the short call is covered. If the stock does rise above $45 and the call is exercised, the customer simply converts the bonds and delivers the converted shares. Any option buying strategy does not meet the customer's specifications, since it requires a money outlay. The sale of a put does not make sense, even though it would be profitable if the market rises. If the market falls, the put would be exercised, requiring the customer to buy the stock again! There is no "cover" if this occurs and a margin deposit is required. This customer wishes to minimize any additional capital outlay, so this strategy in not appropriate.

The purchase of a put is a: A. bull strategy B. bear strategy C. neutral strategy D. bear/neutral strategy

B. bear strategy

A customer would buy put contracts because the customer: A. is bullish on the underlying security B. is bearish on the underlying security C. is neutral on the underlying security D. wishes to generate ordinary income

B. is bearish on the underlying security

In November, a customer buys 1 ABC Jan 70 Call @ $4 when the market price of ABC is 71. If ABC falls to $67 and stays there through January, the customer will: A. gain $400 B. lose $400 C. gain $6,700 D. lose $6,700

B. lose $400

A customer buys 1 ABC Jul 40 Put at $6 when the market price of ABC is $38. ABC stock rises to $60 and stays there through July. The customer: A. gains $600 B. loses $600 C. gains $1,400 D. loses $1,400

B. loses $600 If the market rises to $60, the put expires "out the money" (since the strike price is $40). The customer loses the $600 premium paid.

The maximum gain for the holder of a call is: A. the premium paid B. unlimited C. strike price minus premium paid D. strike price plus premium paid

B. unlimited

A customer sells 2 ABC Jan 45 Puts @ $5 when the market price of ABC is $44. ABC stock falls to $32 and the customer is assigned. The customer then sells the stock in the market. The loss is: A. $1,000 B. $1,300 C. $1,600 D. $2,600

C. $1,600 AT $32, the puts are "in the money" and would be exercised forcing the customer to pay the strike price of $45 for shares that are subsequently sold for $32. The loss of 13 points is partially offset by the premiums received of $5 per share for a net loss of 8 points x 200 shares = $1,600.

A customer purchases 100 shares of ABC stock at $34 and buys 1 ABC Jan 30 Put @ $2 on the same day in a cash account. Subsequently, the stock goes to $44 and the customer's put expires and the customer sells the stock in the market at the prevailing market price. The customer has a(n): A. $200 loss B. $800 loss C. $800 gain D. $1,000 gain

C. $800 gain The stock that was purchased for $34, is sold for $44, for a profit of $10 per share. Since a premium of $2 was paid for the put, the net profit is $8 per share = $800 on the 100 shares owned.

An investor writes 1 ABC Jan 45 Call @ $3. The contract subsequently is exercised. The writer is obligated to: A. buy stock at $45 per share B. Buy stock at $48 per share C. Sell stock at $45 per share D. Sell stock at $48 per share

C. Sell stock at $45 per share The writer of a call is obligated to sell stock at the strike price of $45 per share specified in the contract, if exercised. For selling the contract, the writer initially receives a premium of $3 per share.

What position can an investor take to hedge a short stock position? A. long put B. short put C. long call D. short call

C. long call

If the market price is above the strike price on a put contract, the difference is termed the: A. in the money amount B. at the money amount C. out the money amount D. time value amount

C. out the money amount

All of the following are characteristics of index option contracts EXCEPT: A. they are generally issued in European style B. exercise settlement results in a delivery of cash C. they can only be traded at expiration D. trade settlement is next business day

C. they can only be traded at expiration

A customer buys 100 shares of ABC at $65 and buys 1 ABC Jan 65 Put @ $3. The position is profitable at all of the following market prices EXCEPT: A. $71 B. $70 C. $69 D. $68

D. $68 65+3 = 68 STOCK COST + PREMIUM = LONG STOCK/LONG PUT BREAKEVEN

A customer sells short 100 shares of ABC at $50 and sells 1 ABC Jan 50 Put @ $5. This position results in a profit when the market: I. rises II. falls III. Is stable A. I only B. II only C. I and III D. II and III

D. II and III

The purchase of a call has all of the same characteristics as buying stock EXCEPT: A. unlimited gain potential in a rising market B. limited loss potential in a falling market C. Low liquidity risk if the position is to be liquidated D. No erosion of value as the position is held

D. No erosion of value as the position is held

What is the maximum potential loss for a customer who is short 100 shares of ABC stock at $39 and short 1 ABC Jan 35 Put at $6? A. $600 B. $3,500 C. $4,500 D. unlimited

D. unlimited

A customer buys 100 shares of ABC stock at $56 and buys 1 ABC Oct 55 Put @ $3.50 on the same day. The maximum potential gain is: A. $5,150 B. $5,850 C. $5,950 D. unlimited

D. unlimited LONG STOCK / LONG PUT = UNLIMITED GAIN