Exam 14: Options: Puts and Calls

Amy owns 100 shares of ABC stock with a cost basis of $35 a share. The stock is currently trading at $54 a share. Amy believes the price of ABC stock will fall to $45 a share in the near future but over the longer term of 3 to 5 years, increase in value to $75 a share. Amy would like to benefit from the expected near-term decline if it occurs. Therefore, Amy writes a covered call at a strike price of $55 and a premium of $2. (a) How will the covered call help Amy profit if the expected price decline occurs? (b) What is the maximum loss Amy can incur from the call? (c) What is the maximum profit Amy can incur from the call?

Rights are call options issued to current owners of the stock and normally expire within a short period of time.

The value of an interest rate call option increases when interest rates fall.

Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct? I. short the stock II. buy a call at 50 III. write a call at 55 IV. buy a put at 45

Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has I. limited her losses to $275. II. unlimited loss potential. III. limited her gains to $275. IV. unlimited profit potential.

LEAPS is an acronym for

Which of the following variables are part of the Black-Scholes option pricing model? I. the market price of the underlying stock II. the volatility of the underlying security III. the strike price of the option IV. the risk-free rate of interest V. the beta of the underlying security VI. the time remaining before the option expires

Alan just bought 100 shares of Global, Inc. (GLO) at $45 per share and as protection he also bought a three-month put with a $45 strike price at a cost of $400. One of two scenarios is expected to occur in the next three months: (a) GLO stock declines to $33; and (b) GLO stock rises to $61. Calculate the profit or loss under each scenario and explain how the hedge has provided protection for Alan's position in GLO. Ignore transaction costs.

If the S&P 500 index is at 2,888, then the cash value of an S&P 500 index option is

The option premium is the price of the option.

The Dow-Jones Industrial Average is at 26,000. A call option on the Index with a strike price of 259 would be in the money.

Investors buy options at the bid price and sell at the ask price.

Rights and warrants are the riskiest types of options.

If the front month is January, then stock options that trade in the January cycle will have contracts available that expire in

The buyer of a put expects the price of the underlying stock to rise.

The purchase of a June call with a $25 strike price on XXO stock and the sale of a June call with a $30 strike price on XXO stock is known as a

The longer the time to expiration, the lower the option time premium tends to be.

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

Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?

The value of an interest rate call option