Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The value of an interest rate call option

Accepted Answer

A) varies directly with the price of the underlying corporate bond. 
B) increases when the yield on the underlying Treasury security rises. 
C) is based on the market price of U.S.Treasury securities. 
D) decreases when the price of U.S.Treasuries decreases.

Question 3

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Long-term Equity AnticiPation Securities (LEAPS)are a form of option that gives the holder the right to buy newly issued shares of stock directly from the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 6

The prices of puts and calls on the same stock move independently of one another.

Accepted Answer

A) True 
 B)False

Question 7

Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share.Alpha is currently selling at $34 a share.Which of the following statements are true given this information?
I.Rex's option is worth at least $100 today.
II.Rex's option is worthless today.
III.Rex's option has more value today than when he bought it.
IV.Rex's option has less value today than when he bought it.

Accepted Answer

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

Question 8

Bob's DJIA Index call option had a strike price of 181.When he exercised the option, the Dow was at 18,350.

Accepted Answer

A) Bob received $2,500 from the writer of the contract. 
B) Bob paid $250 to the writer of the contract. 
C) Bob received $250 from the writer of the contract. 
D) Bob paid $2,500 to the writer of the contract.

Question 9

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

Accepted Answer

A) True 
 B)False

Question 10

Anthony is confident that shares of SolarTech will greatly increase in value, but thinks that it may be a year or more before that happens.He should buy

Accepted Answer

A) ETF calls. 
B) LEAP puts. 
C) LEAP calls. 
D) Index calls.

Question 11

If yields on Treasury bonds rise

Accepted Answer

A) the value of the corresponding bonds will rise and the value of interest rate index options will fall. 
B) the value of the corresponding bonds and the value of interest rate index options will both fall. 
C) the value of the corresponding bonds will fall and the value of interest rate index options will rise. 
D) the value of the corresponding bonds and the value of interest rate index options will both rise.

Question 12

Jason purchased a six-month put on ABC stock at a cost of $100.The strike price was $15.At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes.

Accepted Answer

A) $15 
B) $16 
C) $14 
D) cannot be determined from the information provided

Question 13

For a call purchased on an organized security exchange, the strike price specifies the

Accepted Answer

A) contractual price at which each of the shares of the underlying stock can be bought. 
B) prevailing market price of one share of the underlying stock. 
C) cost of buying one option contact based on the value of the underlying stock. 
D) intrinsic value of the offsetting put.

Question 14

A put option has a strike price of $32.The current price of the stock is $34.The put option is said to be "in-the-money."

Accepted Answer

A) True 
 B)False

Question 15

LEAPS are a special type of option

Accepted Answer

A) that must be exercised within six months. 
B) that can only be exercised on the expiration date. 
C) that cannot be exercised for at least a year after it is is purchased. 
D) that may have an expiration date as long as three years.

Question 16

Quotations in an option chain will show
I.the most recent bid and ask prices of the option
II.puts and calls for the same expiration date.
III.the strike price.
IV.the highest and lowest price for the option in the previous month.

Accepted Answer

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

Question 17

Which of the following statements concerning Long-term Equity AnticiPation Securities (LEAPS)is correct?

Accepted Answer

A) LEAPS are traded solely in the over-the-counter market. 
B) LEAPS are options that are available only on individual common stocks. 
C) LEAPS typically have a higher quoted price than that of a regular option. 
D) LEAPS generally have a longer life than a warrant.

Question 18

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.

Accepted Answer

A) True 
 B)False

Question 19

In January, JB stock was selling for $50 per share.When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46.Which investors made a profit?
I.the writer of the call
II.the buyer of the call
III.the writer of the put
IV.the buyer of the put

Accepted Answer

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

Question 20

Allison bought 100 shares of MIKO, Inc.stock at a price of $35 a share.In addition, she bought a 35 put on MIKO at a cost of $125.Which of the following are true about Allison's position from now until the option expiration date?
I.Her maximum loss is $3,625.
II.Her maximum loss is $125.
III.Her minimum gain is $125.
IV.Her maximum profit is unlimited.

Accepted Answer

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

Exam 14: Options: Puts and Calls

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

The value of an interest rate call option

Covered call writers have unlimited loss exposure as well as unlimited profit potential.

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

Long-term Equity AnticiPation Securities (LEAPS)are a form of option that gives the holder the right to buy newly issued shares of stock directly from the issuing corporation.

The prices of puts and calls on the same stock move independently of one another.

Bob's DJIA Index call option had a strike price of 181.When he exercised the option, the Dow was at 18,350.

Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.

Anthony is confident that shares of SolarTech will greatly increase in value, but thinks that it may be a year or more before that happens.He should buy

If yields on Treasury bonds rise

Jason purchased a six-month put on ABC stock at a cost of $100.The strike price was $15.At what market price does Jason just break-even on this investment? Ignore transaction costs and taxes.

For a call purchased on an organized security exchange, the strike price specifies the

A put option has a strike price of $32.The current price of the stock is $34.The put option is said to be "in-the-money."

LEAPS are a special type of option

Quotations in an option chain will show I.the most recent bid and ask prices of the option II.puts and calls for the same expiration date. III.the strike price. IV.the highest and lowest price for the option in the previous month.

Which of the following statements concerning Long-term Equity AnticiPation Securities (LEAPS) is correct?

The maximum loss that can be incurred as the buyer of an option is the amount of the option premium.

In January, JB stock was selling for $50 per share.When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46.Which investors made a profit? I.the writer of the call II.the buyer of the call III.the writer of the put IV.the buyer of the put