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Because puts and calls derive their value from the behavior of some other real or financial asset, they are known as derivative securities.
Investors who purchase options acquire nothing more than the right to buy or sell the shares of the underlying security.
Which of the following statements concerning options are correct?
I. Options are derivative securities.
II. The value of an option is dependent upon the value of the underlying security.
III. The seller of the option retains the option premium whether or not the option is exercised.
IV. Options can provide leverage benefits.
Which of the following is true about rights?
The maker of a put or call is the
earn a profit when the option expires without being exercised.
One reason that writing options can be a viable and profitable investment strategy is that
LEAPS are a special type of option
thatmay have an expiration date as long as three years.
the issuing corporation decides to sweeten a bond issue.
LEAPS is an acronym for
Long-Term Equity Anticipation Securities.
American style options can only be exercised on their expiration dates.
Over-the-counter options are less structured than listed options and are primarily purchased by individual investors.
The buyer of a listed American option has which of the following rights?
I. the right to change the expiration date
II. the right to change the strike price
III. the right to resell the option
IV. the right to let the option expire unexercised
is betting the price of the underlying security will increase in value.
Which of the following is a possible official expiration date for a standardized option contract?
The option premium is
The strike price of a put option is the price
the price at which the underlying stock can be sold.
For a call purchased on an organized security exchange, the strike price specifies the
on the third Friday of the expiration month.
The value of a put increases as the price of the underlying security rises.
Rex bought a put on Alpha stock with a strike price of $35 when the market price of Alpha stock was $33 a share. Alpha is currently selling at $34 a share. Which of the following statements are true given this information?
I. Rex's option is worth at least $100 today.
II. Rex's option is worthless today.
III. Rex's option has more value today than when he bought it.
IV. Rex's option has less value today than when he bought it.
One of the major disadvantages of options is
The most important factor affecting the market price of a put or call is the
price behavior of the underlying common stock.
NZMA stock is currently selling for $128. Which of the following options is "in-the-money"?
Which of the following affect the value of puts and calls written on shares of common stock?
I. price volatility of the underlying stock
II. current market price of the underlying stock
III. length of time until the option expiration date
IV. current market interest rate
Andrea wrote a three-month call on Echo stock. The option cost $200 and the strike price was $10. What does the market price of Echo have to be for Andrea to break-even on this investment if the option is exercised? Ignore transaction construed taxes.
Jamie wrote a nine-month put on Beta stock. The strike price was $25 and the market price at the time the option was written was $24. The total price of the option contract was $150. At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.
Which of the following represent in-the-money options?
I. a call when the market price exceeds the strike price
II. a call when the strike price exceeds the market price
III. a put when the market price exceeds the strike price
IV. a put when the strike price exceeds the market price
What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells for $24?
Nowel Inc. stock is currently priced at $42. The present value of the strike price of a call option on this stock is $44. Probability one, as calculated by the Black Scholes option pricing model is .6541; probability 2 is .3722. The value of this option as calculated by Black-Scholes is
Which of the following increase(s) the time premium of a call option?
I. a market price that exceeds the strike price
II. increasing volatility in the market price of the underlying security
III. decreasing market interest rates
IV. decreasing the time to option expiration
Which of the following variables are part of the Black-Scholes option pricing model?
I. the market price of the underlying stock
II. the volatility of the underlying security
III. the strike price of the option
IV. the risk-free rate of interest
V. the beta of the underlying security
VI. the time remaining before the option expires
The writer of a call option is theoretically exposed to an unlimited loss.
Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?
Fred bought 600 shares of Edgewood stock at a price of $19. The stock is currently selling for $53 a share. To protect his profits, Fred should buy
Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct?
I. short the stock
II. buy a call at 50
III. write a call at 55
IV. buy a put at 45
In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit?
I. the writer of the call
II. the buyer of the call
III. the writer of the put
IV. the buyer of the put
In nearly all cases, the purpose of a hedge is to
Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of
Allison bought 100 shares of MIKO, Inc. stock at a price of $35 a share. In addition, she bought a 35 put on MIKO at a cost of $125. Which of the following are true about Allison's position from now until the option expiration date?
I. Her maximum loss is $3,625.
II. Her maximum loss is $125.
III. Her minimum gain is $125.
IV. Her maximum profit is unlimited.
Mathew simultaneously sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. His maximum loss is ________ and his maximum gain is ________.
Writing covered calls protects the writer from losses if the price of the underlying stock declines.
Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as
Mary wrote a 40 call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has
I. limited her losses to $275.
II. unlimited loss potential.
III. limited her gains to $275.
IV. unlimited profit potential.
conservative investment position with limited profits.
While stock index options can be used to play the market as a whole, they are also effective in protecting equity portfolios against falling markets.
The value of an interest rate call option increases when interest rates fall.
Bob's DJIA Index option had a strike price of 125. When he exercised the option, the Dow was at 13,050.
market becomes more volatile.
Stock index options can be used for which of the following investment purposes?
I. protect a portfolio from market declines
II. speculate on the price appreciation of a particular common stock
III. take advantage of a leverage opportunity
IV. create a portfolio hedge
a call option on the Canadian dollar will increase.
A) Buy S&P 500 Index put options.
B) Buy put options on a S & P 500 based ETF.
C) Write S&P 500 Index put options.
D) Either A or B, but not C.
An investor who exercises a call option on a S&P 500 ETF will
receive a cash settlement equivalent to the difference between the strike price and 100 times the current level of the index.
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