Exam 15: Options Markets

If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a ________.

A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ________.

A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is ________, and the maximum per-share gain to the writer of an uncovered call is ________.

An American call option gives the buyer the right to ________.

You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.

If you anticipate a dramatic decline in stock prices, which naked strategy will make you the most profit?

You buy one Huge-Packing August 50 call contract and one Huge-Packing August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is ________.

What strategy is designed to ensure a value within the bounds of two different stock prices?

A quanto provides its holder with the right to ________.

At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit?

Longer-term American-style options with maturities of up to 3 years are called ________.

Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option.

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

The Option Clearing Corporation is owned by ________.

Buyers of listed options ________ required to post margins, and writers of naked listed options ________ required to post margins.

At contract maturity the value of a put option is ________, where X equals the option's strike price and ST is the stock price at contract expiration.

You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?