Exam 14: Options: Puts and Calls

Steve bought 300 shares at a price of $20 per share. The price then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of

An option straddle is the simultaneous purchase (or sale) of both a put and a call option on the same underlying security.

Kyle believes the price of Ajax shares is about to decrease. If he wants to profit from the decline in price, he should____________ on Ajax shares.

Explain how an investor can use a share- index option to hedge a portfolio of common shares.

The value of a call increases as the price of the underlying security rises.

If a share price does not rise or fall by the amount of the option premium, the option will not be exercised.

Warrants are short- term options usually expiring within a year or less.

The two provisions which investors should carefully consider when evaluating share options are the

What is the difference between a naked call option and a covered call option? Which one is riskier and why?

Warrants

Standardised options expire on the last business day of the expiration month.

A put has fundamental value as long as

The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as

The purchase of a June 25 call on XXO share and the sale of a June 30 call on XXO share is known as a