Exam 14: Put and Call Options

Tom Smith purchases 100 shares of DOUBLE Systems stock for $63 per share and wishes to hedge his position by writing a 100 share call option on his holdings. The option has a $65 strike price and a premium of $8.75. If the stock is selling at $64 at the time of expiration, what will be the overall dollar gain or loss on this covered option play? (Consider the change in stock value as well as the gain or loss on the option.)

The longer the time to expiration, the higher the speculative premium per day.

The difference between selling short and buying a put is that the short seller can lose more than the initial investment.

A put is said to be "in-the-money" when the strike price is __________ the market price.

LEAPS have a maximum time to expiration of 5 years.

"In-the-money" and "out-of-the-money" generally mean the same thing regarding put and call options.

The International Securities Market is an ECN (electronic communication network) trading options.

Under what circumstances can the writer of a call option expect to profit?

The speculative premium of a put as a percentage of stock price represents the percent decline in the stock price necessary to break even.

LEAPS:

A stock is selling for $45.75 with a put option available at a $50 strike that has a premium of $7.50. What is the speculative premium of the put?

If you buy one option and write one option on the same underlying stock, you are creating a "spread."

The International Securities Market is an ECN (electronic communication network) trading options and has not been a major factor in its competition with the Chicago Board Options Exchange.

In general, the speculative premiums (in percent) are higher for:

An option can be defined as the right, acquired for a consideration, to buy or sell something at a fixed price within a specified period of time.

A call is said to be "in-the-money" when the strike price is __________ the market price.

Option contracts expire on the last Friday of the month.

At the time of expiration, the premium (price) on a call option:

The _____, which functions as the issuer of all options listed on the exchanges, is responsible for the liquidity and ease of operation of the options market.

Generally, the longer the exercise period, the lower the speculative premium.