Question 1

The total premium (option price) is a combination of a time premium and a speculative premium.

Accepted Answer

A) True 
 B)False

Question 2

Writers of naked call options generally expect stock prices to decline or remain stable.

Accepted Answer

A) True 
 B)False

Question 3

A straddle is a combination of a put and call on:

Accepted Answer

A) the same stock, with the same strike price and expiration date. 
B) different stocks, with the same strike price and expiration date. 
C) different stocks, with different strike price and expirations dates. 
D) the same stock, with the same the strike price and different expiration dates. 
A) the same stock, with the same strike price and expiration date. 
B) different stocks, with the same strike price and expiration date. 
C) different stocks, with different strike price and expirations dates. 
D) the same stock, with the same the strike price and different expiration dates.

Question 4

_________ is a factor which causes the speculative premium to increase.

Accepted Answer

A) Volatility of the underlying stock as measured by beta 
B) Low dividend yield 
C) A long exercise period 
D) All of the above 
A) Volatility of the underlying stock as measured by beta 
B) Low dividend yield 
C) A long exercise period 
D) All of the above

Question 5

If an investor buys an option assuming a stock has bottomed out, but the stock continues to fall, the most he or she can lose is the price of the option, including commissions.

Accepted Answer

A) True 
 B)False

Question 6

The strike price refers to the premium paid by the option buyer for the right to exercise the option.

Accepted Answer

A) True 
 B)False

Question 7

All of the following are advantages of buying call options instead of stock EXCEPT:

Accepted Answer

A) options represent an opportunity to control shares of stock without making a large dollar commitment. 
B) commissions on stock trading are greater than those on options trading. 
C) options can be quite conservative and used to reduce risk. 
D) All of the above are advantages 
A) options represent an opportunity to control shares of stock without making a large dollar commitment. 
B) commissions on stock trading are greater than those on options trading. 
C) options can be quite conservative and used to reduce risk. 
D) All of the above are advantages

Question 8

A major disadvantage of using call options to hedge a short position is that:

Accepted Answer

A) hedging increases the risk of loss on the short sale. 
B) the option premium and commission reduce profit potential. 
C) the price of the stock may go up. 
D) None of the above 
A) hedging increases the risk of loss on the short sale. 
B) the option premium and commission reduce profit potential. 
C) the price of the stock may go up. 
D) None of the above

Question 9

If the market price is above the strike price, a call is "in-the-money."

Accepted Answer

A) True 
 B)False

Question 10

Generally, the higher the beta, the greater the speculative premium.

Accepted Answer

A) True 
 B)False

Question 11

The popularity of options is due to the likelihood of an average investor earning superior returns.

Accepted Answer

A) True 
 B)False

Question 12

The leverage strategy of buying call options is based on the idea that:

Accepted Answer

A) a small change in the price of the underlying common stock can cause a large change in the price of the option. 
B) leverage reduces the risk of loss on the option contract. 
C) leverage reduces the risk of loss on the portfolio. 
D) None of the above 
A) a small change in the price of the underlying common stock can cause a large change in the price of the option. 
B) leverage reduces the risk of loss on the option contract. 
C) leverage reduces the risk of loss on the portfolio. 
D) None of the above

Question 13

A put or call cannot be purchased for a life of less than the standardized periods of 3, 6, or 9 months.

Accepted Answer

A) True 
 B)False

Question 14

Calculate the leverage from holding a call option with a closing price of $3 on February 18 and a closing price of $6.5 on April 6. The stock price on February 18 was $22 and closed at $27 on April 6.

Accepted Answer

5.13 times
Explanation: Percen

Question 15

Block Corp. 40 call option is selling for $6, and the common stock is selling for $41. The intrinsic value is:

Accepted Answer

A) $6, and the speculative premium is $1. 
B) $1, and the speculative premium is $5. 
C) $1, and the speculative premium is $7. 
D) $5, and the speculative premium is $7. 
A) $6, and the speculative premium is $1. 
B) $1, and the speculative premium is $5. 
C) $1, and the speculative premium is $7. 
D) $5, and the speculative premium is $7.

Question 16

Much of the liquidity and ease of operation of the option exchanges is due to the role of the Options Clearing Corporation.

Accepted Answer

A) True 
 B)False

Question 17

Option writers must own common stock in order to write call options on that particular stock.

Accepted Answer

A) True 
 B)False

Question 18

The Options Clearing Corporation functions as a middleman or broker, bringing together writers and buyers of options.

Accepted Answer

A) True 
 B)False

Question 19

Beltran Industries' common stock trades at $42 per share. The 40 call option trades at $4. This option would be:

Accepted Answer

A) in-the-money by $2. 
B) in-the-money by $4. 
C) out-of-the money by $2. 
D) out-of-the-money by $4. 
A) in-the-money by $2. 
B) in-the-money by $4. 
C) out-of-the money by $2. 
D) out-of-the-money by $4.

Question 20

All option contracts are adjusted for stock splits, stock dividends, or other distributions.

Accepted Answer

A) True 
 B)False

Exam 14: Put and Call Options

The total premium (option price) is a combination of a time premium and a speculative premium.

Writers of naked call options generally expect stock prices to decline or remain stable.

A straddle is a combination of a put and call on:

_________ is a factor which causes the speculative premium to increase.

If an investor buys an option assuming a stock has bottomed out, but the stock continues to fall, the most he or she can lose is the price of the option, including commissions.

The strike price refers to the premium paid by the option buyer for the right to exercise the option.

All of the following are advantages of buying call options instead of stock EXCEPT:

A major disadvantage of using call options to hedge a short position is that:

If the market price is above the strike price, a call is "in-the-money."

Generally, the higher the beta, the greater the speculative premium.

The popularity of options is due to the likelihood of an average investor earning superior returns.

The leverage strategy of buying call options is based on the idea that:

A put or call cannot be purchased for a life of less than the standardized periods of 3, 6, or 9 months.

Calculate the leverage from holding a call option with a closing price of $3 on February 18 and a closing price of $6.5 on April 6. The stock price on February 18 was $22 and closed at $27 on April 6.

Block Corp. 40 call option is selling for $6, and the common stock is selling for $41. The intrinsic value is:

Much of the liquidity and ease of operation of the option exchanges is due to the role of the Options Clearing Corporation.

Option writers must own common stock in order to write call options on that particular stock.

The Options Clearing Corporation functions as a middleman or broker, bringing together writers and buyers of options.

Beltran Industries' common stock trades at $42 per share. The 40 call option trades at $4. This option would be:

All option contracts are adjusted for stock splits, stock dividends, or other distributions.

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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