Question 1

The potential loss for a writer of a naked call option on a stock is ________.

Accepted Answer

A)  equal to the call premium 
B)  larger the lower the stock price 
C)  limited 
D)  unlimited 
A)  equal to the call premium 
B)  larger the lower the stock price 
C)  limited 
D)  unlimited D

Question 2

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

Accepted Answer

A)  $200 profit 
B)  $200 loss 
C)  $300 profit 
D)  $300 loss 
A)  $200 profit 
B)  $200 loss 
C)  $300 profit 
D)  $300 loss B

Question 3

A "bet" option is also called a ________ option.

Accepted Answer

A)  barrier 
B)  lookback 
C)  digital 
D)  foreign exchange 
A)  barrier 
B)  lookback 
C)  digital 
D)  foreign exchange C

Question 4

What strategy could be considered insurance for an investment in a portfolio of stocks?

Accepted Answer

A)  covered call 
B)  protective put 
C)  short put 
D)  straddle 
A)  covered call 
B)  protective put 
C)  short put 
D)  straddle

Question 5

You write a put option on a stock. The profit at contract maturity of the option position is ________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.

Accepted Answer

A)  max (P0, X − ST − P0) 
B)  min (−P0, X − ST − P0) 
C)  min (P0, ST − X + P0) 
D)  max (0, ST − X − P0) 
A)  max (P0, X − ST − P0) 
B)  min (−P0, X − ST − P0) 
C)  min (P0, ST − X + P0) 
D)  max (0, ST − X − P0)

Question 6

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a ________.

Accepted Answer

A)  long straddle 
B)  naked put 
C)  protective put 
D)  short stroll 
A)  long straddle 
B)  naked put 
C)  protective put 
D)  short stroll

Question 7

Which one of the following is a correct statement?

Accepted Answer

A)  Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. 
B)  A convertible bond consists of a straight bond plus a specified number of detachable warrants. 
C)  Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year. 
D)  Call options may be convertible into the stock, while warrants are not convertible into the stock. 
A)  Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. 
B)  A convertible bond consists of a straight bond plus a specified number of detachable warrants. 
C)  Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year. 
D)  Call options may be convertible into the stock, while warrants are not convertible into the stock.

Question 8

Strips and straps are variations of ________.

Accepted Answer

A)  straddles 
B)  collars 
C)  money spreads 
D)  time spreads 
A)  straddles 
B)  collars 
C)  money spreads 
D)  time spreads

Question 9

Which of the following strategies makes a profit if the stock price stays stable?

Accepted Answer

A)  long call and short put 
B)  long call and long put 
C)  short call and short put 
D)  short call and long put 
A)  long call and short put 
B)  long call and long put 
C)  short call and short put 
D)  short call and long put

Question 10

When issued, most convertible bonds are issued ________.

Accepted Answer

A)  deep in the money 
B)  deep out of the money 
C)  slightly out of the money 
D)  slightly in the money 
A)  deep in the money 
B)  deep out of the money 
C)  slightly out of the money 
D)  slightly in the money

Question 11

The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is ________.

Accepted Answer

A)  $1,980 
B)  $4,900 
C)  $5,000 
D)  $2,080 
A)  $1,980 
B)  $4,900 
C)  $5,000 
D)  $2,080

Question 12

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

Accepted Answer

A)  Bull spread 
B)  Long put 
C)  Short call 
D)  Straddle 
A)  Bull spread 
B)  Long put 
C)  Short call 
D)  Straddle

Question 13

You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is ________.

Accepted Answer

A)  $120 
B)  $1,000 
C)  $11,000 
D)  $12,000 
A)  $120 
B)  $1,000 
C)  $11,000 
D)  $12,000

Question 14

If the gross profit is positive and the net profit is negative, you will ________.

Accepted Answer

A)  let the option expire with no action 
B)  not exercise the option 
C)  exercise the option 
D)  sell the option for less than the gross profit 
A)  let the option expire with no action 
B)  not exercise the option 
C)  exercise the option 
D)  sell the option for less than the gross profit

Question 15

______ option can only be exercised on the expiration date.

Accepted Answer

A)  A Mexican 
B)  An Asian 
C)  An American 
D)  A European 
A)  A Mexican 
B)  An Asian 
C)  An American 
D)  A European

Question 16

You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

Accepted Answer

A)  $300 profit 
B)  $300 loss 
C)  $500 loss 
D)  $200 profit 
A)  $300 profit 
B)  $300 loss 
C)  $500 loss 
D)  $200 profit

Question 17

________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

Accepted Answer

A)  Writing an uncovered call option 
B)  Writing an uncovered put option 
C)  Buying a call option 
D)  Buying a put option 
A)  Writing an uncovered call option 
B)  Writing an uncovered put option 
C)  Buying a call option 
D)  Buying a put option

Question 18

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:
 
To establish a bull money spread with puts, you would ________.

Accepted Answer

A)  sell the 55 put and buy the 45 put 
B)  buy the 45 put and buy the 55 put 
C)  buy the 55 put and sell the 45 put 
D)  sell the 45 put and sell the 55 put 
A)  sell the 55 put and buy the 45 put 
B)  buy the 45 put and buy the 55 put 
C)  buy the 55 put and sell the 45 put 
D)  sell the 45 put and sell the 55 put

Question 19

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ________.

Accepted Answer

A)  at the money 
B)  in the money 
C)  out of the money 
D)  knocked out 
A)  at the money 
B)  in the money 
C)  out of the money 
D)  knocked out

Question 20

You sell one MBI July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when MBI stock sells for $95 per share. You will realize a ________ on this strip.

Accepted Answer

A)  $300 profit 
B)  $100 loss 
C)  $500 profit 
D)  $200 profit 
A)  $300 profit 
B)  $100 loss 
C)  $500 profit 
D)  $200 profit

Exam 15: Options Markets

The potential loss for a writer of a naked call option on a stock is ________.

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

A "bet" option is also called a ________ option.

What strategy could be considered insurance for an investment in a portfolio of stocks?

You write a put option on a stock. The profit at contract maturity of the option position is ________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a ________.

Which one of the following is a correct statement?

Strips and straps are variations of ________.

Which of the following strategies makes a profit if the stock price stays stable?

When issued, most convertible bonds are issued ________.

The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is ________.

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is ________.

If the gross profit is positive and the net profit is negative, you will ________.

______ option can only be exercised on the expiration date.

You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.

________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is ________.

You sell one MBI July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when MBI stock sells for $95 per share. You will realize a ________ on this strip.

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