Question 1

The prices of puts and calls on the same stock move independently of one another.

Accepted Answer

A) True 
 B)False  False

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

What is the fundamental value of a put contract with a strike price of $25 when the option price is $150 and the underlying common stock sells for $26?

Accepted Answer

A)  $150 
B)  $100 
C)  $0.00 
D)  -$100 
A)  $150 
B)  $100 
C)  $0.00 
D)  -$100 C

Question 4

A naked option is a conservative investment with limited risk.

Accepted Answer

A) True 
 B)False

Question 5

To exercise a call option on the Dow Jones Industrial Average, an investor would need to actually buy all 30 stocks at the strike price.

Accepted Answer

A) True 
 B)False

Question 6

Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following statements are true given this information?
I. Rex's option is worth at least $100 today.
II. Rex's option is worthless today.
III. Rex's option has more value today than when he bought it.
IV. Rex's option has less value today than when he bought it.

Accepted Answer

A)  I and III only 
B)  I and IV only 
C)  II and III only 
D)  II and IV only 
A)  I and III only 
B)  I and IV only 
C)  II and III only 
D)  II and IV only

Question 7

The writer of a covered call has taken a(n)

Accepted Answer

A)  conservative investment position with unlimited potential profits. 
B)  conservative investment position with limited profits. 
C)  aggressive position with limited losses and unlimited potential profits. 
D)  aggressive position with potentially unlimited profits or losses. 
A)  conservative investment position with unlimited potential profits. 
B)  conservative investment position with limited profits. 
C)  aggressive position with limited losses and unlimited potential profits. 
D)  aggressive position with potentially unlimited profits or losses.

Question 8

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as

Accepted Answer

A)  writing a naked call. 
B)  writing a covered call. 
C)  creating a naked cover. 
D)  covering a short position. 
A)  writing a naked call. 
B)  writing a covered call. 
C)  creating a naked cover. 
D)  covering a short position.

Question 9

The buyer of a listed American option has which of the following rights?
I. the right to change the expiration date
II. the right to change the strike price
III. the right to resell the option
IV. the right to let the option expire unexercised

Accepted Answer

A)  I and III only 
B)  III and IV only 
C)  I, III and IV only 
D)  II, III and IV only 
A)  I and III only 
B)  III and IV only 
C)  I, III and IV only 
D)  II, III and IV only

Question 10

The writer of an option creates the option by promising to buy or sell the underlying stock if the option holder chooses to exercise their right to sell or buy the underlying stock.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following methods might be used to protect a profit on a diversified portfolio of stocks?

Accepted Answer

A)  Buy S&P 500 Index put options. 
B)  Buy put options on a S & P 500 based ETF. 
C)  Write S&P 500 Index put options. 
D)  Either A or B, but not C. 
A)  Buy S&P 500 Index put options. 
B)  Buy put options on a S & P 500 based ETF. 
C)  Write S&P 500 Index put options. 
D)  Either A or B, but not C.

Question 12

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

Accepted Answer

A) True 
 B)False

Question 13

The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of
$45) The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes.

Accepted Answer

A)  150% 
B)  200% 
C)  250% 
D)  300% 
A)  150% 
B)  200% 
C)  250% 
D)  300%

Question 14

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

Accepted Answer

A)  leverage. 
B)  straddling. 
C)  hedging. 
D)  triple witching. 
A)  leverage. 
B)  straddling. 
C)  hedging. 
D)  triple witching.

Question 15

Listed options are difficult to sell in the secondary market.

Accepted Answer

A) True 
 B)False

Question 16

In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit?
I. the writer of the call
II. the buyer of the call
III. the writer of the put
IV. the buyer of the put

Accepted Answer

A)  II and III 
B)  I and III 
C)  only III 
D)  II and IV 
A)  II and III 
B)  I and III 
C)  only III 
D)  II and IV

Question 17

Which one of the following options is more expensive? Show all calculations.
(a) A six-month put that carries a $40 strike price on a stock that is currently trading at $35.84, given that the put trades at a 15 percent time value (i.e. the option is trading at a price 15% higher than its intrinsic value); or
(b) A six-month call that carries a $50 strike price on a stock that currently trades at $54.75, while the call trades with a 12 percent time value (i.e. the option is trading at a price 12% higher than its intrinsic value).

Accepted Answer

(a) Value of put = ($40.00 - $35.84) = $

Question 18

The writer of a call option is theoretically exposed to an unlimited loss.

Accepted Answer

A) True 
 B)False

Question 19

Purchasers of stock options

Accepted Answer

A)  own a financial asset with benefits of firm ownership. 
B)  have a claim on the profits of the firm issuing the underlying securities. 
C)  have the obligation to buy or sell a predetermined amount of shares at the strike price. 
D)  have the right to buy or sell a certain number of underlying shares. 
A)  own a financial asset with benefits of firm ownership. 
B)  have a claim on the profits of the firm issuing the underlying securities. 
C)  have the obligation to buy or sell a predetermined amount of shares at the strike price. 
D)  have the right to buy or sell a certain number of underlying shares.

Question 20

The maximum amount the buyer of a put can lose is the cost of the option.

Accepted Answer

A) True 
 B)False

The prices of puts and calls on the same stock move independently of one another.

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

What is the fundamental value of a put contract with a strike price of $25 when the option price is $150 and the underlying common stock sells for $26?

A naked option is a conservative investment with limited risk.

To exercise a call option on the Dow Jones Industrial Average, an investor would need to actually buy all 30 stocks at the strike price.

The writer of a covered call has taken a(n)

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as

The buyer of a listed American option has which of the following rights? I. the right to change the expiration date II. the right to change the strike price III. the right to resell the option IV. the right to let the option expire unexercised

The writer of an option creates the option by promising to buy or sell the underlying stock if the option holder chooses to exercise their right to sell or buy the underlying stock.

Which of the following methods might be used to protect a profit on a diversified portfolio of stocks?

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

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

Listed options are difficult to sell in the secondary market.

In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit? I. the writer of the call II. the buyer of the call III. the writer of the put IV. the buyer of the put

The writer of a call option is theoretically exposed to an unlimited loss.

Purchasers of stock options

The maximum amount the buyer of a put can lose is the cost of the option.

The Investment Environment

Securities Markets and Transactions

Investment Information and Securities Transactions

Return and Risk

Modern Portfolio Concepts

Common Stocks

Analyzing Common Stocks

Stock Valuation

Market Efficiency and Behavioral Finance

Fixed-Income Securities

Bond Valuation

Mutual Funds and Exchange-Traded Funds

Managing Your Own Portfolio

Futures Markets and Securities

Filters

Exam 14: Options: Puts and Calls

The prices of puts and calls on the same stock move independently of one another.

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

What is the fundamental value of a put contract with a strike price of $25 when the option price is $150 and the underlying common stock sells for $26?

A naked option is a conservative investment with limited risk.

To exercise a call option on the Dow Jones Industrial Average, an investor would need to actually buy all 30 stocks at the strike price.

The writer of a covered call has taken a(n)

Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as

The buyer of a listed American option has which of the following rights? I. the right to change the expiration date II. the right to change the strike price III. the right to resell the option IV. the right to let the option expire unexercised

The writer of an option creates the option by promising to buy or sell the underlying stock if the option holder chooses to exercise their right to sell or buy the underlying stock.

Which of the following methods might be used to protect a profit on a diversified portfolio of stocks?

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

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

Listed options are difficult to sell in the secondary market.

In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit? I. the writer of the call II. the buyer of the call III. the writer of the put IV. the buyer of the put

The writer of a call option is theoretically exposed to an unlimited loss.

Purchasers of stock options

The maximum amount the buyer of a put can lose is the cost of the option.

The Investment Environment

Securities Markets and Transactions

Investment Information and Securities Transactions

Return and Risk

Modern Portfolio Concepts

Common Stocks

Analyzing Common Stocks

Stock Valuation

Market Efficiency and Behavioral Finance

Fixed-Income Securities

Bond Valuation

Mutual Funds and Exchange-Traded Funds

Managing Your Own Portfolio

Futures Markets and Securities

Filters