Question 1

The total premium for an option consists of an intrinsic value plus a speculative premium, which declines to zero by the expiration date.

Accepted Answer

A) True 
 B)False

Question 2

An investor striving for maximum leverage will generally buy options that are:

Accepted Answer

A) in-the-money, or slightly out-of-the-money. 
B) out-of-the-money, or slightly in-the-money. 
C) deep in-the-money. 
D) at-the-money. 
A) in-the-money, or slightly out-of-the-money. 
B) out-of-the-money, or slightly in-the-money. 
C) deep in-the-money. 
D) at-the-money.

Question 3

Dividends on the underlying common stock will affect the option price.

Accepted Answer

A) True 
 B)False

Question 4

A stock is selling for $35. You buy an April 30 call option for 3.75 and short (write) an April 30 call option for 1.25. You have entered into a vertical spread. If the stock is $43 at expiration, what will be your profit or loss on the spread?

Accepted Answer

$250
Explanation: @#IMG-DLM& N

Question 5

The writer of a put agrees to sell stock at the strike price.

Accepted Answer

A) True 
 B)False

Question 6

A stock is selling for $45.75, with a call option available at a $40 strike that has a premium of $7.50. What is the intrinsic value of the call?

Accepted Answer

A) $.75 
B) $1.75 
C) $5.00 
D) $5.75 
E) $7.50 
A) $.75 
B) $1.75 
C) $5.00 
D) $5.75 
E) $7.50

Question 7

An investor who wishes to take advantage of a current stock price, but does not expect to have cash available until a specific date in the future, would probably use the _________ strategy to invest in options.

Accepted Answer

A) hedging 
B) leverage 
C) guaranteed price 
D) None of the above 
A) hedging 
B) leverage 
C) guaranteed price 
D) None of the above

Question 8

Expiration dates in the option market:

Accepted Answer

A) were expanded by the introduction of LEAPS. 
B) are variable depending on the company. 
C) are limited to a maximum of 9 months. 
D) occur every month on a 12-month calendar basis for each equity option tradeD. 
A) were expanded by the introduction of LEAPS. 
B) are variable depending on the company. 
C) are limited to a maximum of 9 months. 
D) occur every month on a 12-month calendar basis for each equity option tradeD.

Question 9

All of the following are characteristics of LEAPS except:

Accepted Answer

A) LEAPS have up to two years to expiration. 
B) LEAPS have generally been limited to blue-chip stocks, such as Coca-Cola, Dow Chemical, General Electric, IBM, and others. 
C) LEAPS have the same characteristics as the short-term options, in general. 
D) LEAPS generally have lower premiums because of their length. 
A) LEAPS have up to two years to expiration. 
B) LEAPS have generally been limited to blue-chip stocks, such as Coca-Cola, Dow Chemical, General Electric, IBM, and others. 
C) LEAPS have the same characteristics as the short-term options, in general. 
D) LEAPS generally have lower premiums because of their length.

Question 10

A put writer exposes himself to the risk of declining stock prices.

Accepted Answer

A) True 
 B)False

Question 11

Long-term equity anticipation securities (LEAPS) are nothing more than a long-term option.

Accepted Answer

A) True 
 B)False

Question 12

A call option selling for $8 with a $45 strike price on stock with a market price of $40 has a speculative premium of $3.

Accepted Answer

A) True 
 B)False

Question 13

The Options Clearing Corporation is equally owned by its major trading exchanges.

Accepted Answer

A) True 
 B)False

Question 14

A put is purchased for $5 with a $22 strike price. If the stock ends up at $25, the purchaser breaks even.

Accepted Answer

A) True 
 B)False

Question 15

Option trading thrives under volatile pricing conditions and uncertainty.

Accepted Answer

A) True 
 B)False

Question 16

A call can be used to cover a long position against the risk of rising stock prices.

Accepted Answer

A) True 
 B)False

Question 17

An Arthur Corp. 25 put option is selling for $3 when the stock is trading at $22.

Accepted Answer

A) The intrinsic value is $3 and the speculative premium is 0 
B) The intrinsic value is $3 and the speculative premium is $3 
C) The time to expiration must be very close 
D) A and C 
A) The intrinsic value is $3 and the speculative premium is 0 
B) The intrinsic value is $3 and the speculative premium is $3 
C) The time to expiration must be very close 
D) A and C

Question 18

Calls used to cover a short sale guarantee that no loss can occur.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is NOT an advantage of listed options markets over the previous method of over-the-counter trading?

Accepted Answer

A) Direct contact between buyers and sellers of options 
B) Standardized contract periods and exercise price 
C) More certainty and more efficient trading strategies 
D) All of the above are advantages 
A) Direct contact between buyers and sellers of options 
B) Standardized contract periods and exercise price 
C) More certainty and more efficient trading strategies 
D) All of the above are advantages

Question 20

Assume you purchase 200 shares of stock at $80 per share and wish to hedge part of your position by writing a 100 share option. The option has a strike price of $75 and a premium of $6. If at the time of expiration, the stock is selling at the following prices ($75, $80, $90) what will be your overall gain or loss?

Accepted Answer

At $75, loss is $400

Exam 14: Put and Call Options

The total premium for an option consists of an intrinsic value plus a speculative premium, which declines to zero by the expiration date.

An investor striving for maximum leverage will generally buy options that are:

Dividends on the underlying common stock will affect the option price.

A stock is selling for $35. You buy an April 30 call option for 3.75 and short (write) an April 30 call option for 1.25. You have entered into a vertical spread. If the stock is $43 at expiration, what will be your profit or loss on the spread?

The writer of a put agrees to sell stock at the strike price.

A stock is selling for $45.75, with a call option available at a $40 strike that has a premium of $7.50. What is the intrinsic value of the call?

An investor who wishes to take advantage of a current stock price, but does not expect to have cash available until a specific date in the future, would probably use the _________ strategy to invest in options.

Expiration dates in the option market:

All of the following are characteristics of LEAPS except:

A put writer exposes himself to the risk of declining stock prices.

Long-term equity anticipation securities (LEAPS) are nothing more than a long-term option.

A call option selling for $8 with a $45 strike price on stock with a market price of $40 has a speculative premium of $3.

The Options Clearing Corporation is equally owned by its major trading exchanges.

A put is purchased for $5 with a $22 strike price. If the stock ends up at $25, the purchaser breaks even.

Option trading thrives under volatile pricing conditions and uncertainty.

A call can be used to cover a long position against the risk of rising stock prices.

An Arthur Corp. 25 put option is selling for $3 when the stock is trading at $22.

Calls used to cover a short sale guarantee that no loss can occur.

Which of the following is NOT an advantage of listed options markets over the previous method of over-the-counter trading?

The Investment Setting

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Commodities and Financial Futures

Stock Index Futures and Options

A Basic Look at Portfolio Management and Capital Market Theory

Duration and Bond Portfolio Management

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

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