Question 1

The price behavior of the underlying security is the primary determinant of the price of an option.

Accepted Answer

A) True 
 B)False

Question 2

For all practical purposes, listed stock options always expire

Accepted Answer

A)  on the last business day of the expiration month. 
B)  on the first Monday of every calendar quarter. 
C)  on the third Friday of the expiration month. 
D)  three months from the date of the option purchase. 
A)  on the last business day of the expiration month. 
B)  on the first Monday of every calendar quarter. 
C)  on the third Friday of the expiration month. 
D)  three months from the date of the option purchase.

Question 3

Jamie wrote a nine-month put on Beta stock. The strike price was $25 and the market price of Beta stock at the time the option was written was $24. The total price of the option contract was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.

Accepted Answer

A)  $23.50 
B)  $24.00 
C)  $25.00 
D)  $26.50 
A)  $23.50 
B)  $24.00 
C)  $25.00 
D)  $26.50

Question 4

Grant purchased one call on XYZ stock at an exercise price of $25. The market price of XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. How much profit will Grant make if he exercises the option today and then sells the shares? Ignore all transaction-related costs.

Accepted Answer

A)  $380 
B)  $480 
C)  $500 
D)  $600 
A)  $380 
B)  $480 
C)  $500 
D)  $600

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Puts and calls are issued by the same corporation that issued the underlying stock.

Accepted Answer

A) True 
 B)False

Question 7

Justin owns 400 shares of ORNG stock which he bought 10 months ago at $20 per share and has now risen to $35 per share. He is afraid the stock price will fall before he has owned it for a full year, but wants to postpone realizing profits on the stock for several months, when it will become a long-term rather than short-term gain. He can protect his profit and avoid the short- term capital gains rate by

Accepted Answer

A)  writing covered calls. 
B)  writing puts. 
C)  buying puts. 
D)  buying calls. 
A)  writing covered calls. 
B)  writing puts. 
C)  buying puts. 
D)  buying calls.

Question 8

Which of the following affect the value of puts and calls written on shares of common stock?
I. price volatility of the underlying stock
II. current market price of the underlying stock
III. length of time until the option expiration date
IV. current market interest rate

Accepted Answer

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

Question 9

Which one of the following actions would be the most appropriate hedge to a short sale of common stock?

Accepted Answer

A)  sale of a call 
B)  purchase of a call 
C)  sale of a put 
D)  purchase of a put 
A)  sale of a call 
B)  purchase of a call 
C)  sale of a put 
D)  purchase of a put

Question 10

An investor who exercises a call option on a S&P 500 ETF will

Accepted Answer

A)  purchase ETF shares at the strike price. 
B)  receive a cash settlement equivalent to the difference between the strike price and the current level of the index. 
C)  receive a cash settlement equivalent to the difference between the strike price and 100 times the current level of the index. 
D)  receive a cash settlement equivalent to the difference between the strike price and the current price of the ETF. 
A)  purchase ETF shares at the strike price. 
B)  receive a cash settlement equivalent to the difference between the strike price and the current level of the index. 
C)  receive a cash settlement equivalent to the difference between the strike price and 100 times the current level of the index. 
D)  receive a cash settlement equivalent to the difference between the strike price and the current price of the ETF.

Question 11

In late November, Karen bought FIB February puts with a strike price of $25. The ask price of the put was $281. The current price of FIB shares is $28.40. The intrinsic value of the put is

Accepted Answer

A)  $340. 
B)  $(340). 
C)  $(621). 
D)  $0.00. 
A)  $340. 
B)  $(340). 
C)  $(621). 
D)  $0.00.

Question 12

Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is ______and his maximum gain is______ .

Accepted Answer

A)  $375; $125 
B)  $375; unlimited 
C)  $500; $125 
D)  $275; $125 
A)  $375; $125 
B)  $375; unlimited 
C)  $500; $125 
D)  $275; $125

Question 13

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

Accepted Answer

A)  strike price and the exchange ratio. 
B)  time until expiration and the strike price. 
C)  leverage ratio and the time to maturity. 
D)  premium and the discount. 
A)  strike price and the exchange ratio. 
B)  time until expiration and the strike price. 
C)  leverage ratio and the time to maturity. 
D)  premium and the discount.

Question 14

ETF options are settled in

Accepted Answer

A)  cash. 
B)  ETF shares. 
C)  share of the companies in the index. 
D)  The writer has the choice of settling in either cash or ETF shares. 
A)  cash. 
B)  ETF shares. 
C)  share of the companies in the index. 
D)  The writer has the choice of settling in either cash or ETF shares.

Question 15

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration.

Accepted Answer

A) True 
 B)False

Question 16

A vertical spread with limited risk might involve

Accepted Answer

A)  buying a call and a put on the same stock with the same strike price. 
B)  buying a put at a lower strike price and a call at a higher strike price. 
C)  buying a call at a lower strike price and writing a put at a higher price. 
D)  buying a call at a lower strike price and writing a call at a higher strike price. 
A)  buying a call and a put on the same stock with the same strike price. 
B)  buying a put at a lower strike price and a call at a higher strike price. 
C)  buying a call at a lower strike price and writing a put at a higher price. 
D)  buying a call at a lower strike price and writing a call at a higher strike price.

Question 17

Bill owns 200 shares of EG stock. In November, the market price of EG was $15.45. Bill sold two calls expiring in March with a $16 strike price on EG for $246. From November to March, EG stock price stayed at $15.45. EG paid a quarterly dividend of $0.40 per share on January 31. Over the November-March period, Bill earned

Accepted Answer

A)  $80. 
B)  $(176). 
C)  $326. 
D)  $256. 
A)  $80. 
B)  $(176). 
C)  $326. 
D)  $256.

Question 18

While stock index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.

Accepted Answer

A) True 
 B)False

Question 19

It is riskier to buy an option than to write an option.

Accepted Answer

A) True 
 B)False

Question 20

A long straddle

Accepted Answer

A)  consists of selling and writing an equal number of puts and calls with different strike prices but the same expiration date and the same underlying security. 
B)  is a strategy based on the expectation that the price of the underlying security will be relatively constant. 
C)  consists of buying a call at one strike price and then writing a call at a higher strike price. 
D)  is a strategy that produces profits when the price of the underlying security moves significantly in either direction. 
A)  consists of selling and writing an equal number of puts and calls with different strike prices but the same expiration date and the same underlying security. 
B)  is a strategy based on the expectation that the price of the underlying security will be relatively constant. 
C)  consists of buying a call at one strike price and then writing a call at a higher strike price. 
D)  is a strategy that produces profits when the price of the underlying security moves significantly in either direction.

The price behavior of the underlying security is the primary determinant of the price of an option.

For all practical purposes, listed stock options always expire

Jamie wrote a nine-month put on Beta stock. The strike price was $25 and the market price of Beta stock at the time the option was written was $24. The total price of the option contract was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.

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

Puts and calls are issued by the same corporation that issued the underlying stock.

Which of the following affect the value of puts and calls written on shares of common stock? I. price volatility of the underlying stock II. current market price of the underlying stock III. length of time until the option expiration date IV. current market interest rate

Which one of the following actions would be the most appropriate hedge to a short sale of common stock?

An investor who exercises a call option on a S&P 500 ETF will

In late November, Karen bought FIB February puts with a strike price of $25. The ask price of the put was $281. The current price of FIB shares is $28.40. The intrinsic value of the put is

Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is and his maximum gain is .

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

ETF options are settled in

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration.

A vertical spread with limited risk might involve

While stock index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.

It is riskier to buy an option than to write an option.

A long straddle

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 price behavior of the underlying security is the primary determinant of the price of an option.

For all practical purposes, listed stock options always expire

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

Puts and calls are issued by the same corporation that issued the underlying stock.

Which of the following affect the value of puts and calls written on shares of common stock? I. price volatility of the underlying stock II. current market price of the underlying stock III. length of time until the option expiration date IV. current market interest rate

Which one of the following actions would be the most appropriate hedge to a short sale of common stock?

An investor who exercises a call option on a S&P 500 ETF will

In late November, Karen bought FIB February puts with a strike price of $25. The ask price of the put was $281. The current price of FIB shares is $28.40. The intrinsic value of the put is

Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is ______and his maximum gain is______ .

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

ETF options are settled in

Once the call premium is recouped, the profit from a call is only limited by the price increases of the underlying stock prior to the contract expiration.

A vertical spread with limited risk might involve

While stock index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.

It is riskier to buy an option than to write an option.

A long straddle

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

Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is and his maximum gain is .