Deck 28: Options: Puts and Calls

Question 1

If an option has no intrinsic value, it is "out of the money."​

Answer 1

True

Question 2

The value of a stock index put option will rise if the market as a whole declines.​

Answer 2

True

Question 3

The primary reason for purchasing an option is the income it generates.​

Answer 3

False

Question 4

Put and call options are bought and sold (i.e., are traded) in secondary markets.​

Question 5

An out of the money option will expire at the expiration date.​

Question 6

The value of a stock index put option rises as security prices rise.​

Question 7

One advantage offered by options is the potential to increase your return on an investment.​

Question 8

If the price of a stock is less than the strike price, a call has no intrinsic value (that is, out of the money).​

Question 9

The intrinsic value of the put is the price of the stock minus the option's strike price.​

Question 10

If an individual owns a portfolio of common stocks and wants to hedge the portfolio, that investor may sell a stock index call option.​

Question 11

An option's price tends to exceed the option's intrinsic value.​

Question 12

Purchasing a put is similar to selling a stock short. Both positions anticipate that the price of the stock will fall.​

Question 13

At expiration an option will sell for its intrinsic value.​

Question 14

A call is an option to sell stock at a specified price within a specified time period.​

Question 15

Writers of call options anticipate earning the time premium the call demands.​

Question 16

The time premium tends to reduce the potential leverage an option offers.​

Question 17

A put option is the right to sell stock at a specified price within a specified time period.​

Question 18

Over time the time premium paid for an option tends to rise.​

Question 19

An option's time premium rises as the option approaches expiration.​

Question 20

The intrinsic value of a call option rises as the price of the underlying stock falls.​

Question 21

​Features (i.e., terms) of a call option include
1)the option's price
​2) the strike price
3) the expiration date

A)​​1 and 2
B)​1 and 3
C)​2 and 3
D)​all the three

Question 22

The volatility index (VIX)​

A) ​is derived from stock valuations
B) ​combines stocks and call options
C) ​combines bonds and put options
D) ​is derived from put and call index options

Question 23

A naked call option writer​
1) profits if stock prices rise
2) profits if stock prices fall
3) owns the underlying stock
4)does not own the underlying stock

A)1 and 3
B)1 and 4​
C)​2 and 3
D)2​ and 4

Question 24

​A call's intrinsic value
​1) determines its maximum price
2) determines its minimum price
3) rises as the price of the stock declines
4) rises as the price of the stock rises

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 25

​One advantage associated with selling (i.e., writing) a ​call option includes

A) potential leverage​
B) ​income from collecting dividends
C) ​income from the sale of the option
D) increased potential for capital gains

Question 26

​If the numerical value of the VIX rises,

A) ​
Investor fear has diminished
​
​
B) ​investors are becoming more complacent
C) ​securities prices are more volatile
D) ​yields on securities have increased

Question 27

​When a call option is exercised,

A) ​the firm issues new stock
B) the writer supplies the stock
C) the firm's earnings are diluted
D) ​the option is converted into stock

Question 28

If you expect a stock's price to fall, you may
1) buy a call option
2) write a call option
3) buy a put option
4) write a put option

A)1 and 3​
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 29

​What are the following call options' intrinsic values and time premiums if the price of the underlying stock is $55? $$\begin{array} { r c } \text { Option strike price } & \text { Price of the call } \\\text { Call at } \$ 50 & \$ 7.00 \\\text { Call at } \$ 55 & 3.00 \\\text { Call at } \$ 60 & 0.50\end{array}$$

Question 30

The buyer of a put option​

A) ​expects prices to rise
B) expects prices to fall
C) owns the underlying stock​
D) ​does not own the underlying stock

Question 31

An investor who writes a call option closes the position by​

A) purchasing the stock​
B) ​selling the option
C) letting the option expire​
D) repurchasing the option

Question 32

The VIX is based on index put and call options instead of individual stocks.​

Question 33

​At expiration, an option
1) is worth its intrinsic value
2) has no time premium
3) may be exercised by the buyer but not by the writer

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​all three

Question 34

​Which of the following is similar to a short position in a stock?

A) ​buying a call option
B) ​buying a put option
C) realizing a short-term capital gain
D) ​writing a covered call

Question 35

The intrinsic value of a call option is​

A) ​the strike price plus the stock price
B) the strike price minus the stock price
C) the stock price minus the strike price
D) the stock price minus the call's market price​

Question 36

Stock index options are settled in cash.​

Question 37

If the stock market declines,​
1) the owner of a stock index call option profits
2) the owner of a stock index call option loses
3) the writer of a stock index call option profits
4) the writer of a stock index call option loses

A)1 and 3​
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 38

Naked option writing is more risky than covered call option writing.​

Question 39

A put option is the right to​

A) buy stock
B) ​receive dividends
C) ​sell stock
D) ​earn capital gains

Question 40

The volatility index is often interpreted as an index of investor fear.​

Question 41

A put is the option to sell stock at $35. The price of the stock is $34, and the price of the put is $2.​
​
a. What is the intrinsic value of the put?
​
b. What is the time premium paid for the put?
​
c. What is the percentage return on an investment in the put if at the expiration of the put the price of the stock is $31?

Question 42

What are the intrinsic values and time premiums of the following call options if the price of the underlying stock is $35? What are the profits and losses to the buyers and the writers if the stock sells for $31 at the options' expiration?

Question 43

​You are given the following information concerning a stock and a call option and a put option
Price of the stock $\$ 42$
Strike price (both options) $\$ 40$
Price of the call
$\$ 6$
Price of the put
$\$ 3$
Expiration date
three months
a. What is the call's intrinsic value?
b. What is the time premium paid for the call?
c. What is the put's intrinsic value?
d. What is the time premium paid for the put?
e. If the price of the stock declines to $25, what is the maximum amount you could lose by buying the call?
f. If the price of the stock declines to $25, what is the maximum amount you profit by buying the put?
g. If after three months the price of the stock is $48, what is the profit (loss) from buying the call?
h. If after three months the price of the stock is $48, what is the profit (loss) from selling the put?