Deck 15: Exchange-Traded Options

Question 1

Since a put is the right to sell, the holder is said to have the short position.

Answer 1

False

Question 2

The clearinghouse 'novates' share option trading.

Answer 2

True

Question 3

The long position will only pay the option premium if they decide to exercise the option.

Answer 3

False

Question 4

The clearinghouse in the ETO market requires option buyers to make margin payments.

Question 5

The option buyer can be referred to as the option 'holder' or the 'long position'.

Question 6

Dealers and brokers both play a role in the ASX options market.

Question 7

One equity option contract traded on the ASX covers 500 of the underlying shares.

Question 8

The option seller can be referred to as the option 'writer' or the 'long position'.

Question 9

Options differ from other derivatives because the holder does not have to settle the contract if they choose not to.

Question 10

An option seller can avoid a loss by choosing not to exercise the option.

Question 11

A call option's intrinsic value depends on its fair value.

Question 12

A European-form option contract allows the holder to exercise it any time prior to the option's expiry date.

Question 13

An option can be exercised only by its holder.

Question 14

One of the key differences between an option contract and a futures contract is that the long position taker in an option contract must pay some amount of money to obtain the option.

Question 15

The ASX derivatives market arranges trade in American-form options only.

Question 16

ASX options have as the contract item an actively traded share.

Question 17

The best outcome for the short position is when the options lapse at expiry.

Question 18

When an option is exercised, it is always to the advantage of the long position and to the disadvantage of the short position.

Question 19

The clearinghouse in the ETO market requires option sellers to make margin payments.

Question 20

A call option entitles its holder to buy the contract item if they so choose.

Question 21

Time value represents the present value of an option's expected future outcomes.

Question 22

Trading in an option determines its value, and deducting its intrinsic value reveals the market's estimate of its time value.

Question 23

The only income the option seller can earn is the option's premium.

Question 24

A call option can be used to hedge the risk of a price rise in the underlying asset.It establishes a price cap for acquiring the asset equal to the exercise price.

Question 25

Holding all else constant, call options with higher strike prices have a lower value.

Question 26

A call option loses intrinsic value when the share price falls.

Question 27

Holding all else constant, put options with higher exercise prices have a lower value.

Question 28

A call option is equivalent to a leveraged investment in the underlying asset.

Question 29

An option's time value is greatest when it is 'at-the-money'.

Question 30

A call option can be used to hedge the risk of a price rise in the underlying asset.

Question 31

Futures contracts, like options contracts, have an asymmetric payoff at expiry.

Question 32

The seller of a call option (with an exercise price of $18.50, sold for $1.05)over JB Hi-Fi shares will make a loss of $1.26 per share if the holder exercises when the share price is $19.76.

Question 33

While ever an option is out of the money, time works gradually in the favour of the seller.

Question 34

Higher volatility in the underlying asset's price has a negative impact on option prices because it indicates greater risk.

Question 35

At expiry, a holder of a call option (with an exercise price of $18.50, purchased for a premium of $1.05)over JB Hi-Fi shares will exercise if the share-price is $19.76.

Question 36

Option traders are only interested in the historical volatility of the underlying asset.

Question 37

A call option's intrinsic value forms an asymmetric pattern in relation to the price of the underlying asset when the option is at-the-money.

Question 38

The time value of call options is positively related to time to expiry whereas the time value of put options is negatively related to time to expiry.

Question 39

A $12.00 call that cost 65 cents will be allowed to lapse if the share price at expiry has reached only $12.25.

Question 40

At expiry, a holder of a call option (with an exercise price of $18.50, purchased for a premium of $1.05)over JB Hi-Fi shares will NOT exercise if the share-price is $19.00.

Question 41

A rising price for the contract item will lead to rising losses for the holder of a short position in a put option.

Question 42

A lender can use an interest rate option to secure a floor on its lending rate but forgoes any benefit from a rise in future lending rates.

Question 43

A bull spread is a combination of a long call with a low exercise price and a short call with a high exercise price.

Question 44

The holder of an in-the-money option that has one month to expiry would prefer to close out the position on the ASX market, rather than exercise the option.

Question 45

Consider the $13.50 and $13.00 May Swans Inc.calls that are trading at 7 and 13 cents, when the share price is $12.34.The $13.00 call is a better buy, as it is only 6 cents more expensive whereas its exercise price is 50 cents lower.

Question 46

It makes sense for traders expecting a stagnant market with low levels of volatility to take a short straddle position with exercise prices close to the current asset price.

Question 47

The value of an option moves on a dollar-for-dollar basis with the price of the underlying asset.

Question 48

A bull spread is a more aggressive (high risk/high return)option position than buying a call.

Question 49

An option trader will acquire a long straddle if the trader expects a share price to become much more volatile than the market expects.

Question 50

Long put positions are taken by speculative traders who expect the put's price (its premium)to fall.

Question 51

Option strategies are formed by combining option positions or combining an option position with a position in the underlying asset.

Question 52

An interest rate cap can be established by buying put options on successive BAB futures contracts.

Question 53

Traders expecting an increase in price volatility of the underlying share will consider a short straddle, while long straddles may be used by those expecting a decrease in volatility.

Question 54

The Black-Scholes is the best known option-pricing formula.

Question 55

Selling an option is equivalent to selling volatility in the underlying asset.

Question 56

Put options allow investors to make profits when share prices are falling.

Question 57

The holder of an 'out-of-the-money' call option will not necessarily benefit from a rise in the underlying asset's share price.

Question 58

Options can be profitable even when share prices are stable.

Question 59

When an option is exercised the time value component is lost.

Question 60

A buy-and-write strategy is equivalent to a short put on the asset.

Question 61

ASX options are:

A)for l00 of the underlying shares
B)exclusively European-form options
C)traded in wholesale-sized parcels only
D)traded over every listed share.
E)None of these are correct.

Question 62

Option sellers:

A)are not required to make margin payments
B)must own the underlying shares
C)must make margin payments to ensure they can meet their obligations
D)cannot lose more than the option premium.
E)None of the above is correct.

Question 63

A planned future purchase of Swans shares is hedged by a long $20 call purchased for $1.10.This has established:

A)a minimum buying price of $20 per share
B)a minimum buying price of $21.10 per share
C)an effective per share of $20
D)a price cap of $20 per share
E)a price cap of $21.10 per share

Question 64

An exchange-traded option contract is:

A)a method by which companies can raise additional equity financing
B)a perpetual contract, like a share
C)the right, but not the obligation, to settle the contract
D)a derivative contract that can be acquired for free
E)a derivative contract that is traded OTC.

Question 65

How does the ASX increase liquidity in its options market?

A)It concentrates trading in a small number of contracts.
B)Brokers must charge fixed, low commissions.
C)It has only four contract dates per year.
D)It authorises dealers to make the market for specific contracts.
E)It allows options to be written over any listed share.

Question 66

Caps are interest rate options that protect an investor from interest rate falls below the specified level.

Question 67

At expiry, a holder of a call option with an exercise price of $32 (purchased for a premium of $0.85)over Wesfarmers shares (now trading at $33.65)will:

A)exercise with a profit of $1.65 per share
B)exercise with a profit of $0.80 per share
C)exercise with a profit of $0.85 per share
D)not exercise with a loss of $0.85 per share.
E)None of these.

Question 68

A call option is said to be 'in the money' when:

A)the price of the share is greater than the exercise price
B)the price of the share is less than the exercise price
C)the price of the share is the same as the exercise price
D)when the option position is profitable.
E)None of these are correct.

Question 69

A fund manager plans to purchase 100 000 shares in BHP Billiton next month.Which of the following would be most suitable to hedge the risk of a price rise?

A)Long calls
B)Short calls
C)Long puts
D)Short puts
E)Short futures

Question 70

Option buyers:

A)are not required to make margin payments
B)must own the underlying shares
C)must make margin payments to ensure they can meet their obligations
D)stand to lose much more than the option premium.
E)None of these are correct.

Question 71

The seller of a put option:

A)has the right to buy the underlying asset at the exercise price
B)has the obligation to sell the underlying asset to the holder if the option is exercised
C)has the right to sell the underlying asset at the exercise price
D)has the obligation to buy the underlying asset from the holder if the option is exercised.
E)None of these are correct.

Question 72

An American option:

A)is the right, but not obligation, to buy the underlying asset
B)is the right, but not obligation, to sell the underlying asset
C)is the right, but not obligation, to exercise the option on or before a fixed date
D)is the right, but not obligation, to exercise the option on the expiry date only
E)is a type of option that is traded in the US only.

Question 73

Which of the following features of options is determined by traders rather than the exchange?

A)Contract item
B)Contract size
C)Expiry date
D)Exercise price
E)Option premium

Question 74

Exchange-traded options over shares:

A)are issued by the underlying company
B)are issued by the exchange
C)are issued by a financial institution
D)are created when a bid matches an offer.
E)None of these are correct.

Question 75

Call options:

A)have intrinsic value equal to S - X
B)have positive intrinsic value when S > X
C)have intrinsic value X > S
D)have negative intrinsic value when X > S
E)have positive intrinsic value when S > X and negative intrinsic value when X > S

Question 76

The best outcome for the seller of a call options is:

A)the options are exercised by the holder
B)when the options lapse at expiry
C)when the share price is greater than the exercise price
D)when the value of the option increases.
E)None of these.

Question 77

The profit or loss on a long call at expiry is equal to:

A)(maximum of (X - S)or zero)+ option premium
B)(maximum of (X - S)or zero)- option premium
C)(maximum of (S - X)or zero)- option premium
D)(maximum of (S - X)or zero)+ option premium.
E)Cannot be negative.

Question 78

The holder of an option contract:

A)has purchased it from the seller by paying the exercise price
B)is known as the 'short' position
C)has the obligation to settle the contract
D)can choose to buy or sell the contract item on the exercise date
E)will exercise the option contract at expiry if it is advantageous for them to do so.

Question 79

The profit or loss for the holder of a $5 call option (purchased for $0.50)given the share price at expiry is $5.20, will be:

A)zero, because they will not exercise
B)a loss of $0.50, because they will not exercise
C)a loss of $0.30, because they will exercise
D)a profit of $0.20, because they will exercise.
E)None of these are correct.

Question 80

The buyer of a call option:

A)has the right to buy the underlying asset at the exercise price
B)has the obligation to sell the underlying asset to the holder if the option is exercised
C)has the right to sell the underlying asset at the exercise price
D)has the obligation to buy the underlying asset from the holder if the option is exercised.
E)None of these are correct.