Question 1

Warrants

Accepted Answer

A)  provide substantially less capital appreciation potential than the underlying stock. 
B)  tend to be quite costly. 
C)  have a stipulated price and an expiration date. 
D)  are not traded in the secondary markets because of their low unit costs. 
A)  provide substantially less capital appreciation potential than the underlying stock. 
B)  tend to be quite costly. 
C)  have a stipulated price and an expiration date. 
D)  are not traded in the secondary markets because of their low unit costs.

Question 2

The majority of today's options are stock options traded primarily on the CBOE and on AMEX.

Accepted Answer

A) True 
 B)False

Question 3

One could temporarily protect profits on a highly diversified portfolio of large company stocks by
I. selling S&P 500 Index put options.
II. buying S&P 500 Index put options.
III. buying S&P 500 Index call options.
IV. selling S&P 500 Index call options.

Accepted Answer

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

Question 4

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

Accepted Answer

In a naked call, the option writer does

Question 5

Which of the following is true about rights?

Accepted Answer

A)  They are usually attached to bonds as a "sweetener." 
B)  The owner has several years in which to exercise the option. 
C)  They are a type of short-lived call option. 
D)  They are a type of short-lived put option. 
A)  They are usually attached to bonds as a "sweetener." 
B)  The owner has several years in which to exercise the option. 
C)  They are a type of short-lived call option. 
D)  They are a type of short-lived put option.

Question 6

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

Accepted Answer

A) True 
 B)False

Question 7

Which one of the following statements concerning options is correct?

Accepted Answer

A)  One option covers 1,000 shares of stock. 
B)  A put gives the option holder the right to buy a stated amount of securities. 
C)  The owner of a call is entitled to the dividends paid on the underlying shares of stock. 
D)  Option holders can profit on movements of the price of the underlying security. 
A)  One option covers 1,000 shares of stock. 
B)  A put gives the option holder the right to buy a stated amount of securities. 
C)  The owner of a call is entitled to the dividends paid on the underlying shares of stock. 
D)  Option holders can profit on movements of the price of the underlying security.

Question 8

In nearly all cases, the purpose of a hedge is to

Accepted Answer

A)  reduce or eliminate risk. 
B)  make a very high profit in an extremely short time frame. 
C)  speculate on a downward drop in a general market index. 
D)  speculate on an upward movement in a given currency. 
A)  reduce or eliminate risk. 
B)  make a very high profit in an extremely short time frame. 
C)  speculate on a downward drop in a general market index. 
D)  speculate on an upward movement in a given currency.

Question 9

Writing covered calls protects the writer from any losses if the price of the underlying stock declines.

Accepted Answer

A) True 
 B)False

Question 10

The premium on a stock index call would be expected to increase as the

Accepted Answer

A)  market becomes more volatile. 
B)  option life nears expiration. 
C)  index price falls further below the strike price. 
D)  underlying securities stabilize in value. 
A)  market becomes more volatile. 
B)  option life nears expiration. 
C)  index price falls further below the strike price. 
D)  underlying securities stabilize in value.

Question 11

Long-term Equity AnticiPation Securities (LEAPS) are a form of option that gives the holder the right to buy newly issued shares of stock directly from the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 12

What is the time value of a put with a strike price of $30 when the option price is $500 and the underlying common stock sells for $27?

Accepted Answer

A)  $100 
B)  $200 
C)  $300 
D)  $400 
A)  $100 
B)  $200 
C)  $300 
D)  $400

Question 13

Stock index options can be used for which of the following investment purposes?
I. protect a portfolio from market declines
II. speculate on the price appreciation of a particular common stock
III. take advantage of a leverage opportunity
IV. create a portfolio hedge

Accepted Answer

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

Question 14

Steve bought 300 shares of stock at a price of $20 per share. The price of the stock 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 of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of

Accepted Answer

A)  $200. 
B)  $240. 
C)  $2,640. 
D)  $3,000. 
A)  $200. 
B)  $240. 
C)  $2,640. 
D)  $3,000.

Question 15

Options can provide a lot of price action for a limited dollar investment.

Accepted Answer

A) True 
 B)False

Question 16

Quotations in an option chain will show
I. the most recent bid and ask prices of the option.
II. puts and calls for the same expiration date.
III. the strike price.
IV. the highest and lowest price for the option in the previous month.

Accepted Answer

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

Question 17

For the writer of in-the-money covered calls , losses on the options contract will be nullified by gains on the stock.

Accepted Answer

A) True 
 B)False

Question 18

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

An option's strike price is the stock price at which the option holder breaks even.

Accepted Answer

A) True 
 B)False

Warrants

The majority of today's options are stock options traded primarily on the CBOE and on AMEX.

One could temporarily protect profits on a highly diversified portfolio of large company stocks by I. selling S&P 500 Index put options. II. buying S&P 500 Index put options. III. buying S&P 500 Index call options. IV. selling S&P 500 Index call options.

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

Which of the following is true about rights?

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

Which one of the following statements concerning options is correct?

In nearly all cases, the purpose of a hedge is to

Writing covered calls protects the writer from any losses if the price of the underlying stock declines.

The premium on a stock index call would be expected to increase as the

Long-term Equity AnticiPation Securities (LEAPS) are a form of option that gives the holder the right to buy newly issued shares of stock directly from the issuing corporation.

What is the time value of a put with a strike price of $30 when the option price is $500 and the underlying common stock sells for $27?

Stock index options can be used for which of the following investment purposes? I. protect a portfolio from market declines II. speculate on the price appreciation of a particular common stock III. take advantage of a leverage opportunity IV. create a portfolio hedge

Options can provide a lot of price action for a limited dollar investment.

Quotations in an option chain will show I. the most recent bid and ask prices of the option. II. puts and calls for the same expiration date. III. the strike price. IV. the highest and lowest price for the option in the previous month.

For the writer of in-the-money covered calls , losses on the options contract will be nullified by gains on the stock.

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.

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

An option's strike price is the stock price at which the option holder breaks even.

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

Warrants

The majority of today's options are stock options traded primarily on the CBOE and on AMEX.

One could temporarily protect profits on a highly diversified portfolio of large company stocks by I. selling S&P 500 Index put options. II. buying S&P 500 Index put options. III. buying S&P 500 Index call options. IV. selling S&P 500 Index call options.

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

Which of the following is true about rights?

The party that accepts the legal obligation to stand behind the option is the buyer of the contract.

Which one of the following statements concerning options is correct?

In nearly all cases, the purpose of a hedge is to

Writing covered calls protects the writer from any losses if the price of the underlying stock declines.

The premium on a stock index call would be expected to increase as the

Long-term Equity AnticiPation Securities (LEAPS) are a form of option that gives the holder the right to buy newly issued shares of stock directly from the issuing corporation.

What is the time value of a put with a strike price of $30 when the option price is $500 and the underlying common stock sells for $27?

Stock index options can be used for which of the following investment purposes? I. protect a portfolio from market declines II. speculate on the price appreciation of a particular common stock III. take advantage of a leverage opportunity IV. create a portfolio hedge

Options can provide a lot of price action for a limited dollar investment.

Quotations in an option chain will show I. the most recent bid and ask prices of the option. II. puts and calls for the same expiration date. III. the strike price. IV. the highest and lowest price for the option in the previous month.

For the writer of in-the-money covered calls , losses on the options contract will be nullified by gains on the stock.

Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.

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

An option's strike price is the stock price at which the option holder breaks even.

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