Deck 7: Options Markets

Question 1

For a call and a put written on the same underlying but at at possibly different strike prices,
(a) Both call and put options may be in-the-money at the same time.
(b) If the call is in-the-money, then the put will be out-of-the-money.
(c) If one of the options is out-of-the-money, then the other one is guaranteed to be in-the-money.
(d) At least one option will be in-the-money.

Answer 1

A.

Question 2

You have a long position in a stock that you purchased for $100, and a short position in a put option on the same stock at strike K = 100. At maturity the stock price is $95, and you liquidate your stock and option positions. Your gross payoff (cash flow) is
(a) $0
(b) $5
(c) $90
(d) $95

Answer 2

C

Question 3

Which of the following is a valid completion of the sentence-"An American option ..."?
(a) Reflects the higher impatience of Americans relative to Europeans.
(b) Is traded in America and Europe, whereas European options are only traded in Europe.
(c) Is exercisable prior to maturity whereas European options are not.
(d) All of the above.

Answer 3

C.

Question 4

The value of the following position for options at the same strike price is always zero:
(a) A long call and a long put.
(b) A short call and a short put.
(c) Both (a) and (b). (
D) Neither (a) nor (b).

Question 5

You have a portfolio with long positions in both puts and calls. The volatility in the market rises.
(a) Your portfolio gains in value.
(b) Your portfolio gains on the calls and loses on the puts.
(c) Your portfolio gains on the puts and loses on the calls.
(d) Your portfolio is now more risky and is therefore worth less than before.

Question 6

If you believe that stock prices are going to fall for sure, then given a fixed amount of capital, you should
(a) Sell stock now.
(b) Sell call options.
(c) Buy put options.
(d) All of the above.

Question 7

You have $100 to invest in a stock (or options on the stock). The stock is trading for $100. The three-month 100-strike calls on the stock are trading at $4 each. The minimum stock price you expect to see after three months is $60. What is the worst case return on investment you can possibly end up with using stock and/or options?
(a) -100%
(b) -40%
(c) 0%
(d) +6%

Question 8

If your directional view is that stock prices are going to fall, you should
(a) Sell stock now.
(b) Sell call options.
(c) Buy put options.
(d) All of the above are profitable strategies.

Question 9

You hold the following portfolio: a long position in a European call option on gold with a strike of $975 per oz, a short position in a European put option on gold with a strike of $975 per oz, and a short forward position in gold with a delivery price of $1,000 per oz. All three contracts expire in one month. The value of your position is
(a) Positive.
(b) Negative.
(c) Zero.
(d) Can be positive, negative, or zero.

Question 10

You sold a call option at strike 105 for a price of $3 and sold a put option at strike 95 for a price of $2, both options with the same maturity. In what range of stock prices at maturity will you make money or not lose (on your net payoff)?
(a) 90-110
(b) 93-102
(c) 95-105
(d) 97-108

Question 11

The premium of an option is
(a) The price of the option.
(b) The value of the right but not the obligation to undertake a purchase or sale of the underlying asset.
(c) Is always non-negative.
(d) All of the above.

Question 12

You have $100 to invest. You can invest it in one of two alternatives. The first is to invest it in a stock that is trading for $100. The second is to buy three-month 100-strike calls on the stock that are currently trading at $4 each. You expect the stock price to appreciate with a maximum price after three months of $110. What is the maximum return on investment you can generate using stock and options?
(a) 10%
(b) 50%
(c) 150%
(d) 250%

Question 13

If you expect stock volatility to fall but have no particular view of direction, then you should
(a) Sell stock now.
(b) Sell call options.
(c) Buy put options.
(d) All of the above.

Question 14

The largest markets for derivatives based on notional outstandings are
(a) Equity derivatives.
(b) Interest-rate derivatives.
(c) Commodity derivatives.
(d) Currency derivatives.

Question 15

A call option with a strike of K = 100 is purchased at a premium of $4. The stock price at maturity is $105. The net payoff of the option is
(a) $1
(b) $5
(c) $96
(d) $101

Question 16

If you expect stock volatility to rise but have no particular view of direction, then you should
(a) Sell stock now.
(b) Sell call options.
(c) Buy put options.
(d) All of the above.

Question 17

You have a long position in a stock that you purchased for $100, a short position in a call and a long position in a put, both at strike K = 100. At maturity the stock price is S_T, and you liquidate your stock and option positions. Your gross payoff (cash flow) is
(a) 0
(b) S_T.- 100
(c) 100
(d) 100 - S_T

Question 18

The writer of a put option on a stock
(a) Has the right but not the obligation to sell the stock.
(b) Has the right but not the obligation to buy the stock.
(c) Has the obligation but not the right to sell the stock.
(d) Has the obligation but not the right to buy the stock.

Question 19

You anticipate that volatility will increase sharply and the stock price will fall. Select the most profitable of the following portfolios to hold, given your views:
(a) Long stock and long calls.
(b) Short stock and long puts.
(c) Long calls and short puts.
(d) Short stock and short calls.

Question 20

Which of the following statements is true of an option's payoff?
(a) The gross payoff is always strictly greater than the net payoff.
(b) The gross payoff is always strictly less than the net payoff.
(c) The gross payoff can be greater or less than than the net payoff.
(d) The gross payoff is equal to the net payoff in virtually all cases.

Question 21

You sell an IBM call option for $4. The strike price of the option is $120, and the maturity is one year. At maturity, the price of the IBM stock is $126. Your profit/loss over the entire transaction is:
(a) $3 profit
(b) $2 loss
(c) $6 loss
(d) $4 profit

Question 22

If you expect the price of a stock to decrease and its volatility to increase, then the most appropriate strategy to use is a
(a) Long put
(b) Short put
(c) Long Call
(d) Short call

Question 23

I hold a long position in a call option on IBM stock. If the price of IBM goes down and its volatility goes up, then the value of my call option
(a) Increases.
(b) Decreases.
(c) Is unaffected.
(d) May increase, decrease, or stay the same.

Question 24

Which of the following statements is TRUE?
(a) The maximum possible loss to the buyer of a call option is unlimited
(b) The maximum possible loss to the seller of a call option is unlimited
(c) The maximum possible loss to the buyer of a put option is unlimited
(d) The maximum possible loss to the seller of a put option is unlimited

Question 25

A seller of a naked put option will want the value of the underlying asset to _______ and a buyer of a naked call option will want the value of the underlying asset to ______.
(a) decrease, decrease
(b) decrease, increase
(c) increase, decrease
(d) increase, increase

Question 26

An investor who holds a short call option on IBM stock is implicitly
(a) Bullish on direction and bearish on volatility
(b) Bearish on direction and bullish on volatility
(c) Bearish on direction and volatility
(d) Bullish on direction and volatility