Options

Which of the following is true about rights?

Puts and calls are issued by the same corporation that A) They are usually attached to bonds as a
issued the underlying stock. (True or false) "sweetener."
B) The owner has several years in which to exercise
Rights and warrants are the riskiest types of options. the option.
(True or false) C) They are a type of short-lived call option.
D) They are a type of short-lived put option.
Which of the following statements concerning
options are correct? Which one of the following statements concerning
I. Options are derivative securities. options is correct?
II. The value of an option is dependent upon the A) One option covers 1,000 shares of stock.
value of the underlying security. B) A put gives the option holder the right to buy a
III. The seller of the option retains the option stated amount of securities.
premium whether or not the option is exercised. C) The owner of a call is entitled to the dividends
IV. Options can provide leverage benefits. paid on the underlying shares of stock.
D) Option holders can profit on movements of the
A) II and III only price of the underlying security.
B) I, II and III only
C) I, II and IV only LEAPS are a special type of option
D) I, II, III and IV A) that must be exercised within six months.
B) that can only be exercised on the expiration date.
The owner a put is obliged to sell the underlying C) that cannot be exercised for at least a year after it
security at the strike price on the date of expiration. is is purchased.
(True or false) D) that may have an expiration date as long as three
years.
One reason that writing options can be a viable and
profitable investment strategy is that Options allow investors to speculate on price
A) the option writer collects the quarterly dividends. movements without a large initial investment. (True
B) most options expire unexercised. or false)
C) an option writer determines when the option is
exercised. Options are created by investors. (True or false)
D) an option writer can exercise the option to avoid a
potential loss. Because puts and calls derive their value from the
behavior of some other real or financial asset, they
The maker of a put or call is the are known as derivative securities. (True or false)
A) company which issued the underlying security.
B) person who facilitates the trade on the floor of the An American call option gives the owner
exchange. A) the right to buy or sell the stock at the strike price
C) party who writes the option. on or before the expiration date.
D) party who decides whether or not the option is B) the right but not the obligation to buy the stock at
exercised. the strike price on or before the expiration date.
C) the right and the obligation to buy the stock at the
Warrants are short-term options usually expiring strike price on or before the expiration date.
within a year or less. (True or false) D) the right but not the obligation to sell the stock at
the strike price on or before the expiration date.
Rights are call options issued to current owners of the
stock and normally expire within a short period of
time. (True or false)
The strike price of a put option is the price Technically, listed options expire on the Saturday
A) an investor must pay for the options contract. following the third Friday of the expiration month.
B) of the underlying stock at the time that the options (True or false)
contract is purchased.
C) the price at which the underlying stock can be The buyer of a listed American option has which of
sold. the following rights?
D) the price at which the underlying stock can be I. the right to change the expiration date
bought. II. the right to change the strike price
III. the right to resell the option
The writer of a put IV. the right to let the option expire unexercised
A) accepts the obligation to sell a predetermined
number of shares at a predetermined price. A) I and III only
B) is betting the price of the underlying security will B) III and IV only
increase in value. C) I, III and IV only
C) is hoping that the put will be in-the-money prior to D) II, III and IV only
expiration.
D) will pay the premium whether or not the option is European options can only be exercised on the
exercised. expiration date but can be sold to another investor on
any trading day. (True or false)
The option premium is
A) the market price of the option. Which of the following is a possible official
B) the amount by which the stock price is expected to expiration date for a standardized option contract?
move before the option expires. A) Saturday, October 17
C) the fee charged by the options exchanges for B) Monday, March 1
executing transactions. C) Friday, April 30
D) the difference between the strike price and the D) Wednesday, May 19
underlying price of the security.
LEAPS is an acronym for
Listed options trade over-the-counter. (True or false) A) Lehman and Ellsworth Authority Strips.
B) Liability & Equity Asset Securities.
American style options can only be exercised on their C) LYONS Earnings Anticipation Stocks.
expiration dates. (True or false) D) Long-Term Equity Anticipation Securities.

Listed options Stocks options that trade in the January cycle will
A) are traded directly between the buyer and the have contracts available that expire in
seller. A) January, February, April, and July.
B) are rarely traded in the secondary markets. B) March, June, September, December.
C) have readily available price information. C) January, February, March, and April.
D) are sold over the counter. D) each of the next 12 months.

Which one of the following was the first listed Over-the-counter options are less structured than
exchange for stock options in the United States? listed options and are primarily purchased by
A) Stock Index Board individual investors. (True or false)
B) Philadelphia Board of Trade
C) New York Stock Exchange The majority of today's options are stock options
D) Chicago Board Options Exchange traded primarily on the CBOE and on AMEX. (True
or false)
Warrants are generally created when The buyer of a put expects the price of the underlying
A) a firm decides to execute a stock split. stock to rise. (True or false)
B) the issuing corporation decides to sweeten a bond
issue. A put option has a strike price of $32. The current
C) a LEAP expires and automatically converts. price of the stock is $34. The put option is said to be
D) a financial institution decides to create them based "in-the-money." (True or false)
on market conditions.
The option premium is the price of the option. (True
Warrants or false)
A) provide substantially less capital appreciation
potential than the underlying stock. One of the major disadvantages of options is
B) tend to be quite costly. A) their lifespan.
C) have a stipulated price and an expiration date. B) their cost.
D) are not traded in the secondary markets because of C) their lack of liquidity.
their low unit costs. D) the risk to option buyers.

Standardized options expire on the last business day Investors buy options at the bid price and sell at the
of the expiration month. (True or false) ask price. (True or false)

The party that accepts the legal obligation to stand Rex bought a put on Alpha stock with a strike price
behind the option is the buyer of the contract. (True of $35 when the market price of Alpha stock was $33
or false) a share. Alpha is currently selling at $34 a share.
Which of the following statements are true given this
An options strike price is the stock price at which the information?
option holder breaks even. (True or false) I. Rex's option is worth at least $100 today.
II. Rex's option is worthless today.
The most important factor affecting the market price III. Rex's option has more value today than when he
of a put or call is the bought it.
A) market interest rate. IV. Rex's option has less value today than when he
B) expiration date. bought it.
C) price behavior of the underlying common stock.
D) price behavior of the corresponding warrant. A) I and III only
B) I and IV only
The value of a call increases as the price of the C) II and III only
underlying security rises. (True or false) D) II and IV only

Lew paid $300 to purchase a call on Delta stock with For all practical purposes, listed stock options always
a strike price of $25. What does the market price of expire
Delta have to be for Lew to break-even on his option A) on the last business day of the expiration month.
investment? Ignore transaction costs and taxes. B) on the first Monday of every calendar quarter.
C) on the third Friday of the expiration month.
A) $22 D) three months from the date of the option purchase.
B) $25
C) $28 (300/100=3 prem. + 25) Which of the following affect the value of puts and
D) cannot be determined from the information calls written on shares of common stock?
provided I. price volatility of the underlying stock
II. current market price of the underlying stock
The buyer of a put and the writer of the a both profit III. length of time until the option expiration date
if the price of the stock falls. (True or false) IV. current market interest rate
A) I and II only Andrea wrote a three-month call on Echo stock. The
B) I, II and III only option cost $200 and the strike price was $10. What
C) II, III and IV only does the market price of Echo have to be for Andrea
D) I, II, III and IV to break-even on this investment if the option is
exercised? Ignore transaction construed taxes.
Grant purchased one call on XYZ stock at an exercise A) $10
price of $25. The market price of XYZ stock when B) $12
Grant purchased the call was $24 a share. XYZ is C) $8
currently priced at $30 a share. Grant paid $120 to D) cannot be determined from the information
buy the call. How much profit will Grant make if he provided
exercises the option today and then sells the shares?
Ignore all transaction-related costs. Nowel Inc. stock is currently priced at $42. The
present value of the strike price of a call option on
A) $380 this stock is $44. Probability one, as calculated by the
B) $480 Black Scholes option pricing model is .6541;
C) $500 probability 2 is .3722. The value of this option as
D) $600 calculated by Black-Scholes is
A) $(2.00).
NZMA stock is currently selling for $128. Which of B) $11.10.
the following options is "in-the-money"? C) $2.000.
A) March 130 call D) $10.71.
B) February 125 call
C) March 125 put Which of the following represent in-the-money
D) February 100 put options?
I. a call when the market price exceeds the strike
The value of a put increases as the price of the price
underlying security rises. (True or false) II. a call when the strike price exceeds the market
price
Jason purchased a six-month put on ABC stock at a III. a put when the market price exceeds the strike
cost of $100. The strike price was $15. At what price
market price does Jason just break-even on this IV. a put when the strike price exceeds the market
investment? Ignore transaction costs and taxes. price
A) $15 A) I and III only
B) $16 B) I and IV only
C) $14 C) II and III only
D) cannot be determined from the information D) II and IV only
provided
The writer of a call option is theoretically exposed to
For a call purchased on an organized security an unlimited loss. (True or false)
exchange, the strike price specifies the
A) contractual price at which each of the shares of the Once the call premium is recouped, the profit from a
underlying stock can be bought. call is only limited by the price increases of the
B) prevailing market price of one share of the underlying stock prior to the contract expiration.
underlying stock. (True or false)
C) cost of buying one option contact based on the
value of the underlying stock.
D) intrinsic value of the offsetting put.
What is the time premium of a put with a strike price If a stock price does not rise or fall by the amount of
of $25 when the option price is $2 and the underlying the option premium, the option will not be exercised.
common stock sells for $24? (True or false)
A) $100
B) $200 Which of the following variables are part of the
C) $300 Black-Scholes option pricing model?
D) $400 I. the market price of the underlying stock
II. the volatility of the underlying security
Jamie wrote a nine-month put on Beta stock. The III. the strike price of the option
strike price was $25 and the market price at the time IV. the risk-free rate of interest
the option was written was $24. The total price of the V. the beta of the underlying security
option contract was $150. At what market price will VI. the time remaining before the option expires
Jamie just break-even on this investment? Ignore
transaction costs and taxes. A) I, II, IV and VI only
A) $23.50 B) I, II and III only
B) $24.00 C) I, II, III, IV and VI only
C) $25.00 D) I, II, III, IV, V and VI
D) $26.50
The maximum amount the buyer of a put can lose is
If you expect the price of a security to decline, you the cost of the option. (True or false)
could buy a call to protect your financial position.
(True or false) What is the fundamental value of a call with a strike
price of $30 and a market price of $33?
The longer the time to expiration, the lower the A) -$300
option time premium tends to be. (True or false) B) -$3
C) $3
A put has fundamental value as long as D) $300
A) the market price of the underlying financial asset
has a positive value. The maximum loss that can be incurred as the buyer
B) the market price of the underlying financial asset of an option is the amount of the option premium.
is less than the strike price. (True or false)
C) the strike price of the put is greater than the time
premium of the put. Options can provide a lot of price action for a limited
D) the strike price of the put is less than the market dollar investment. (True or false)
value of the underlying asset.
In January, JB stock was selling for $50 per share.
What is the fundamental value of a put contract with When the calls and the puts with a strike price of $45
a strike price of $25 when the option price is $1.50 expired on March 20, JB was selling at $46. Which
and the underlying common stock sells for $26? investors made a profit?
A) $150 I. the writer of the call
B) $100 II. the buyer of the call
C) $0.00 III. the writer of the put
D) -$100 IV. the buyer of the put

One of the primary advantages of options is the A) II and III

leverage they provide. (True or false) B) I and III
C) only III
D) II and IV
Kyle believes the price of Ajax stock is about to D) II, III and IV only
decrease. If he wants to profit from the decline in
price, he should ________ on Ajax stock. The purchase of a June 25 call on XXO stock and the
A) buy a call sale of a June 30 call on XXO stock is known as a
B) write a put A) long straddle.
C) buy a put B) short straddle.
D) sell a put C) vertical spread.
D) horizontal spread.
An option straddle is the simultaneous purchase (or
sale) of both a put and a call option on the same Mathew simultaneously sold a July 40 put on ZXY
underlying security. (True or false) stock for $200 and bought a July 35 put for $75. His
maximum loss is ________ and his maximum gain is
The price of ABC stock is currently $42 per share, ________.
but in six months you expect it to rise to $50. ABC A) $375, $125
does not pay a dividend. You buy a six-month call on B) $375, unlimited
ABC, with a strike price of $45. The option cost C) $500, $125
$200. What holding period return do you expect on D) $275, $125
this call? Ignore transaction costs and taxes.
A) 150% For the writer of in-the-money covered calls , losses
B) 200% on the options contract will be nullified by gains on
C) 250% the stock. (True or false)
D) 300%
Shares of Lakewood, Inc. are currently selling for
Steve bought 300 shares of stock at a price of $20 per $52.63. You believe the stock will decline in price
share. The price of the stock then went up to $33 per ranging from $30 to $32 in the next few months.
share so Steve decided to hedge his position by Which of the following strategies will allow you to
purchasing 3 puts at a cost of $120 each. The puts profit if your prediction is correct?
have an exercise price of 30. One week prior to the I. short the stock
expiration of the puts, the price of the stock was at II. buy a call at 50
$22 per share. If Steve closed out all of his positions III. write a call at 55
at that time, he would have earned a net profit of IV. buy a put at 45
A) $200.
B) $240. A) II and IV only
C) $2,640. B) I and III only
D) $3,000. C) III and IV only
D) I, III and IV only
Allison bought 100 shares of MIKO, Inc. stock at a
price of $35 a share. In addition, she bought a 35 put A naked option is a conservative investment with
on MIKO at a cost of $125. Which of the following limited risk. (True or false)
are true about Allison's position from now until the
option expiration date? Which one of the following actions would be the
I. Her maximum loss is $3,625. most appropriate hedge to a short sale of common
II. Her maximum loss is $125. stock?
III. Her minimum gain is $125. A) sale of a call
IV. Her maximum profit is unlimited. B) purchase of a call
C) sale of a put
A) I and IV only D) purchase of a put
B) II and III only
C) II and IV only
Roselle paid $250 to buy one put option with a strike A) Bob received $5,500 from the writer of the
price of $35. What is the maximum profit Roselle can contract.
earn on her option contract? B) Bob paid $550 to the writer of the contract.
A) $100 C) Bob received $550 from the writer of the contract.
B) $350 D) Bob received $55,000 from the writer of the
C) $3,250 contract
D) Her profit potential is unlimited.
Long-term Equity AnticiPation Securities (LEAPS)
The purchase of a June 25 call on XXO stock and the are a form of option that gives the holder the right to
sale of a June 30 call on XXO stock is known as a buy newly issued shares of stock directly from the
A) long straddle. issuing corporation. (True or false)
B) short straddle.
C) vertical spread. To exercise a call option on the Dow Jones Industrial
D) horizontal spread. Average, an investor would need to actually buy all
30 stocks at the strike price. (True or false)
A long straddle
A) consists of selling and writing an equal number of While stock index options can be used to play the
puts and calls with different strike prices but the same market as a whole, they are also effective in
expiration date and the same underlying security. protecting equity portfolios against falling markets.
B) is a strategy based on the expectation that the price (True or false)
of the underlying security will be relatively constant.
C) consists of buying a call at one strike price and ETF options are settled in
then writing a call at a higher strike price. A) cash.
D) is a strategy that produces profits when the price B) ETF shares.
of the underlying security moves significantly in C) share of the companies in the index.
either direction. D) The writer has the choice of settling in either cash
or ETF shares.
Fred bought 600 shares of Edgewood stock at a price
of $19. The stock is currently selling for $53 a share. Anthony is confident that shares of SolarTech will
To protect his profits, Fred should buy greatly increase in value, but thinks that it may be a
A) 600 call options with a strike price of $55. year or more before that happens. He should buy
B) 600 put options with a strike price of $50. A) ETF calls.
C) 6 call options with a strike price of $55. B) LEAP puts.
D) 6 put options with a strike price of $50. C) LEAP calls.
D) Index calls.
Tiffany would like to own shares of Blackwood, Inc.
but only if she can acquire them at a total cost of $30 Writing covered calls may result in a profit to the
a share or less. Blackwood is currently trading at writer even if the stock price does not change. (True
$31.76. Cynthia should ________ with a strike price or false)
of $30. Ignore transaction costs.
A) buy a call Put and call index options are available only the S&P
B) buy a put 500 Index, the NASDAQ 100 and the DJIA. (True or
C) write a call false)
D) write a put
The value of an interest rate call option increases
when interest rates fall. (True or false)
Bob's DJIA Index option had a strike price of 125. If the S&P 500 index is at 1,461, then the cash value
When he exercised the option, the Dow was at of an S&P 500 index option is
13,050. A) $14.61.
B) $1,461. D) aggressive position with potentially unlimited
C) $14,610. profits or losses.
D) $146,100.
Covered call writers have unlimited loss exposure as
Writing covered calls protects the writer from losses well as unlimited profit potential. (True or false)
if the price of the underlying stock declines. (True or
false) Matt owns 500 shares of IKM stock. The market
price of IKM is $51.74. Matt just sold five calls on
One could temporarily protect profits on a highly IKM with a strike price of $50. This is known as
diversified portfolio of large company stocks by A) writing a naked call.
A) selling S&P 500 Index put options. B) writing a covered call.
B) buying S&P 500 Index put options. C) creating a naked cover.
C) buying S&P 500 Index call options. D) covering a short position.
D) selling S&P 500 Index call options.
Justin owns 400 shares of ORNG stock which he
Mary wrote a 40 call on ABC stock at a price of bought 10 months ago at $20 per share and has now
$275. She does not own any shares of ABC. Mary risen to $35 per share. He is afraid the stock price
has will fall before he has owned it for a full year, but
I. limited her losses to $275. wants to postpone realizing profits on the stock for
II. unlimited loss potential. several months, when it will become a long-term
III. limited her gains to $275. rather than short-term gain. He can protect his profit
IV. unlimited profit potential. and avoid the short-term capital gains rate by
A) writing covered calls.
A) I and IV only B) writing puts.
B) II and III only C) buying puts.
C) I and III only D) buying calls.
D) II and IV only
The premium on a stock index call would be
Bill owns 200 shares of EG stock. In November, the expected to increase as the
market price of EG was $15.45. Bill sold two March A) market becomes more volatile.
16 calls on EG for $246. Between November and B) option life nears expiration.
March, EG stock fluctuated between $14.75 and C) index price falls further below the strike price.
$15.85. EG paid a quarterly dividend of $0.40 per D) underlying securities stabilize in value.
share on January 31. Over the November-March
period, Bill earned Which of the following methods might be used to
protect a profit on a diversified portfolio of stocks?
A) $80. A) Buy S&P 500 Index put options.
B) $(176). B) Buy put options on a S & P 500 based ETF.
C) $336. C) Write S&P 500 Index put options.
D) $256. D) Either A or B, but not C.

The writer of a covered call has taken a(n) The currency option strike price of 163 means that
A) conservative investment position with unlimited A) $1 is worth 1.63 units of the foreign currency.
potential profits. B) $1 is worth 163 units of the foreign currency.
B) conservative investment position with limited C) one unit of the foreign currency is worth $1.63.
profits. D) one unit of the foreign currency is worth $163.
C) aggressive position with limited losses and
unlimited potential profits. Stock index options can be used for which of the
following investment purposes?
I. protect a portfolio from market declines A) varies directly with the price of the underlying
II. speculate on the price appreciation of a particular corporate bond.
common stock B) increases when the yield on the underlying
III. take advantage of a leverage opportunity Treasury security rises.
IV. create a portfolio hedge C) is based on the market price of U. S. Treasury
securities.
A) I and IV only D) decreases when the price of U.S. Treasuries
B) II and IV only decreases.
C) I and III only
D) I, III and IV only

Which of the following statements concerning

Long-term Equity AnticiPation Securities (LEAPS) is
correct?
A) LEAPS are traded solely in the over-the-counter
market.
B) LEAPS are options that are available only on
individual common stocks.
C) LEAPS typically have a higher quoted price than
that of a regular option.
D) LEAPS generally have a longer life than a
warrant.

If the Canadian dollar became stronger relative to the

U.S. dollar, the price of
A) a call option on the Canadian dollar will increase.
B) a put option on the Canadian dollar will increase.
C) a call option on the Canadian dollar will decrease.
D) both the call and the put options on the Canadian
dollar will decrease.

An investor who exercises a call option on a S&P 500

ETF will
A) purchase ETF shares at the strike price.
B) receive a cash settlement equivalent to the
difference between the strike price and the current
level of the index.
C) receive a cash settlement equivalent to the
difference between the strike price and 100 times the
current level of the index.
D) receive a cash settlement equivalent to the
difference between the strike price and the current
price of the ETF.

The value of an interest rate call option