Deck 15: Stock Options Market

Question 1

In the U.S., options are traded on the:

A) Philadelphia Stock Exchange.
B) CBOE.
C) American Stock Exchange.
D) NYSE.
E) All of the above.

Answer 1

All of the above.

Question 2

Which of the following statement is most correct?

A) Exchange-traded stock options are for one unit of the designated common stock.
B) Options have standardized expiration dates.
C) The longest time for an option on a stock is six months.
D) b and c only.
E) All of the above.

Answer 2

b and c only.

Question 3

LEAPS are:

A) Short-term options.
B) Long-term options.
C) Nearby options.
D) Perpetual options.
E) None of the above.

Answer 3

Long-term options.

Question 4

The Black-Scholes option pricing model:

A) Computes a fair option price.
B) Derives the price for a European call option.
C) Prices options written on a nondividend-paying stock.
D) b and c only.
E) All of the above.

Question 5

If the price of a call option in the market is higher than that derived from the Black-Scholes option pricing model, an investor could:

A) Sell the call option and buy a certain number of shares in the underlying stock.
B) Buy the call option and buy a certain number of shares in the underlying stock.
C) Buy the call option and sell short a certain number of shares in the underlying stock.
D) Sell the call option and sell short a certain number of shares in the underlying stock
E) None of the above.

Question 6

Of the five factors that influence the price of an option:

A) The strike price must be estimated.
B) The stock price is observed.
C) The standard deviation must be estimated.
D) b and c only.
E) All of the above.

Question 7

Hedging with options by taking a position in the underlying stock allows the investor to lock in:

A) The riskless arbitrage profit.
B) The abnormal return.
C) The riskfree rate.
D) Price risk.
E) None of the above.

Question 8

The Black-Scholes model is based on several restrictive assumptions, including:

A) Constant variance of the stock price.
B) Stock prices are continuous and smooth.
C) Zero taxes and transactions costs.
D) Equal borrowing and lending rates.
E) All of the above.

Question 9

Option strategies that do not involve an offsetting or risk-reducing position in either another option or the underlying common stock is called:

A) Naked strategies.
B) Covered strategies.
C) Hedge strategies.
D) Active strategies.
E) Passive strategies.

Question 10

To take advantage of an anticipated increase in the stock price while, at the same time, limiting the maximum loss to the option, the investor will use a:

A) Short call strategy.
B) Long call strategy.
C) Cash-secured put writing strategy.
D) Long-call paper buying strategy.
E) None of the above.

Question 11

The most straightforward option strategy for benefiting from an expected decrease in the price of some common stock while avoiding the unfavorable consequences should the price rise is to follow a:

A) Long put strategy.
B) Short put strategy.
C) Long call strategy.
D) Short call strategy.
E) None of the above.

Question 12

A long/call paper buying strategy involves:

A) Purchasing a call option.
B) Investing in a riskfree security.
C) Buying a put option.
D) a and b only.
E) None of the above.

Question 13

If an investor wants to purchase a stock at a price less than the prevailing market price:

A) Place a limit order.
B) Write a put option with a strike price near the desired price.
C) Sell a call option.
D) a and b only.
E) None of the above.

Question 14

A covered or hedge strategy involves:

A) A position in an option.
B) Funds invested in a riskfree security.
C) A position in the underlying stock.
D) a and c only.
E) All of the above.

Question 15

To protect the value of a stock held in a portfolio against the risk of a decline in the market value, an investor would follow:

A) A covered call writing strategy.
B) A protective put buying strategy.
C) A butterfly spread.
D) A short call strategy.
E) None of the above.

Question 16

Strategies that combine two or more options on the same underlying stock, include:

A) Vertical spreads.
B) Butterfly spreads.
C) Diagonal spreads.
D) Straddles.
E) All of the above.

Question 17

A warrant, which gives the holder the right but not the obligation to buy a designated number of shares at a specified price before a set date, is equivalent to:

A) A call option.
B) A put option.
C) A straddle.
D) A spread.
E) None of the above.

Question 18

Warrants differ from exchange-traded call options in that:

A) Warrants have much shorter expiration dates.
B) The issuer of the warrant is the company itself.
C) The exercise of warrants results in a dilution of earnings.
D) b and c only.
E) All of the above.

Question 19

Which of the following is false?

A) Warrants are attached to a bond or preferred stock.
B) Warrants may be detached from the host security that they were attached to.
C) Warrants can be traded separately on major national exchanges.
D) Warrants have a value.
E) None of the above.

Question 20

To control portfolio risk, institutional investors us:

A) Naked option strategies.
B) Covered call writing.
C) Protective put buying.
D) All of the above.
E) None of the above.

Question 21

The most important use of options is to alter return distributions.

Question 22

Investors use the options market to generate abnormal returns.

Question 23

After considering transactions costs, the market for stock options appears to be efficient.

Question 24

The binomial option pricing model can handle American call options.

Question 25

Compare and contrast a warrant and an exchange-traded call option.

Question 26

Explain how a protective put buying strategy can protect the value of a stock in a portfolio against the risk of a decline in market value.