Exam 17: An Introduction to Options

A put and a call have the following terms: The price of the stock is currently $55. The price of the call and put are, respectively, $9 and $1. What will be the profit from buying the call or buying the put if, after six months, the price of the stock is $40, $50, or $60

The writer of a covered call cannot lose money if the price of the stock rises.

One reason for writing and selling a covered calloption is

If the price of an option to buy stock were to sellfor less than its strike price, an opportunity for arbitrage exists.

The intrinsic value of a put establishes the put'smaximum price.

Calls tend to sell for a time premium that exceeds the stock's price.

A warrant is the option to buy one share of stock at $40. It expires after one year and currently sells for $10. The price of the stock is $32. What is the maximum possible profit if an investor buys one share of stock and shorts one warrant What is the range of stock prices that yields a profit on this position

Holders of calls do not receive the cash dividendspaid to the company's stockholders.

Warrants and calls do not have

Options to buy stock offer

The buyer of a call option wants the price of the stock to rise.

The writer of a call option does not receive any dividends paid by the firm.

Because of the small cash outlay to buy an option, these securities are considered to be conservative investments.

In-the-money stock index options are not exercised.

If the price of a stock rises substantially,the investor who wrote a covered call1. earns a modest profit2. sustains a modest loss3. lost an opportunity for a large profit

The time premium paid for an option reduces the option's potential leverage.

Writing covered call options is more risky than writing naked call options

A call option is similar to a warrant except

The value of a put is inversely related to the value ofthe underlying stock.

The profits (gains) on option trading are exempt from federal income taxation.