Question 1

Which one of the statements about margin requirements on option positions is not correct?

Accepted Answer

A)   The margin required will be lower if the option is in the money.
B)   If the required margin exceeds the posted margin, the option writer will receive a margin call.
C)   A buyer of a put or call option does not have to post margin.
D)   Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.E) B) and D)
F) All of the above

Question 2

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.
Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

Accepted Answer

A)   $200
B)   $300
C)   $700
D)   $400E) A) and B)
F) All of the above

Question 3

Exchange-traded stock options expire on the ________ of the expiration month.

Accepted Answer

A)   second Monday
B)   third Wednesday
C)   second Thursday
D)   third FridayE) None of the above
F) B) and C)

Question 4

Advantages of exchange-traded options over OTC options include all but which one of the following?

Accepted Answer

A)   ease and low cost of trading
B)   anonymity of participants
C)   contracts that are tailored to meet the needs of market participants
D)   no concerns about counterparty credit riskE) B) and D)
F) A) and C)

Question 5

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is ________ in August.

Accepted Answer

A)   either lower than $44.25 or higher than $55.75
B)   between $44.25 and $55.75
C)   higher than $55.75
D)   lower than $44.25E) A) and B)
F) None of the above

Question 6

The writer of a put option ________.

Accepted Answer

A)   agrees to sell shares at a set price if the option holder desires
B)   agrees to buy shares at a set price if the option holder desires
C)   has the right to buy shares at a set price
D)   has the right to sell shares at a set priceE) B) and C)
F) All of the above

Question 7

A covered call strategy benefits from what environment?

Accepted Answer

A)   Falling interest rates
B)   Price stability
C)   Price volatility
D)   Unexpected eventsE) A) and B)
F) All of the above

Question 8

Exercise prices for listed stock options usually occur in increments of ________ and bracket the current stock price.

Accepted Answer

A)   $1
B)   $5
C)   $20
D)   $25E) A) and C)
F) A) and B)

Question 9

Which of the following expressions represents the value of a call option to its holder on the expiration date?

Accepted Answer

A)   ST − X if ST > X, 0 if ST ≤ X
B)   − (ST − X)  if ST > X, 0 if ST ≤ X
C)   0 if ST ≥ X, X − ST if ST 
D)   0 if ST ≥ X, − (X − ST)  if ST < XE) C) and D)
F) B) and D)

Question 10

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.
How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

Accepted Answer

A)   Buy the call, sell the put; lend the present value of $40.
B)   Sell the call, buy the put; lend the present value of $40.
C)   Buy the call, sell the put; borrow the present value of $40.
D)   Sell the call, buy the put; borrow the present value of $40.E) A) and C)
F) A) and B)

Question 11

You write one MBI July 120 call contract (equaling 100 shares)  for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ________ on the investment.

Accepted Answer

A)   $300 profit
B)   $200 loss
C)   $600 loss
D)   $200 profitE) All of the above
F) C) and D)

Question 12

A time spread may be executed by ________.

Accepted Answer

A)   selling an option with one exercise price and buying a similar one with a different exercise price
B)   buying two options that have the same expiration dates but different strike prices
C)   selling two options that have the same expiration dates but different strike prices
D)   selling an option with one expiration date and buying a similar option with a different expiration dateE) B) and C)
F) A) and D)

Question 13

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Accepted Answer

A)   time spread
B)   long straddle
C)   short straddle
D)   money spreadE) A) and B)
F) None of the above

Question 14

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:

Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is ________.

Accepted Answer

A)   $500
B)   $700
C)   $200
D)   $250E) B) and C)
F) A) and C)

Question 15

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

Accepted Answer

A)   max (0, ST − X) 
B)   min (0, ST − X) 
C)   max (0, X − ST) 
D)   min (0, X − ST) E) A) and C)
F) B) and D)

Question 16

In 1973, trading of standardized options on a national exchange started on the ________.

Accepted Answer

A)   AMEX
B)   CBOE
C)   NYSE
D)   CFTCE) All of the above
F) B) and D)

Question 17

You purchase a call 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 C0 is the original purchase price of the option.

Accepted Answer

A)   max (−C0, ST − X − C0) 
B)   min (−C0, ST − X − C0) 
C)   max (C0, ST − X + C0) 
D)   max (0, ST − X − C0) E) None of the above
F) A) and D)

Question 18

The initial maturities of most exchange-traded options are generally ________.

Accepted Answer

A)   less than 1 year
B)   less than 2 years
C)   between 1 and 2 years
D)   between 1 and 3 yearsE) B) and D)
F) A) and B)

Question 19

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ________ option.

Accepted Answer

A)   an American
B)   a European
C)   an Asian
D)   an AustralianE) B) and C)
F) All of the above

Question 20

An American put option gives its holder the right to ________.

Accepted Answer

A)   buy the underlying asset at the exercise price on or before the expiration date
B)   buy the underlying asset at the exercise price only at the expiration date
C)   sell the underlying asset at the exercise price on or before the expiration date
D)   sell the underlying asset at the exercise price only at the expiration dateE) A) and B)
F) B) and C)

Exam 15: Options Markets

A time spread may be executed by ________.

Correct Answer
verified

The writer of a put option ________.

Correct Answer
verified

You purchase a call option on a stock. The profit at contract maturity of the option position is ________, where X equals the option's strike price, S_T is the stock price at contract expiration, and C₀ is the original purchase price of the option.

Correct Answer
verified

A covered call strategy benefits from what environment?

Correct Answer
verified

Correct Answer
verified

The initial maturities of most exchange-traded options are generally ________.

Correct Answer
verified

In 1973, trading of standardized options on a national exchange started on the ________.

Correct Answer
verified

Correct Answer
verified

Which of the following expressions represents the value of a call option to its holder on the expiration date?

Correct Answer
verified

An American put option gives its holder the right to ________.

Correct Answer
verified

Exchange-traded stock options expire on the ________ of the expiration month.

Correct Answer
verified

Exercise prices for listed stock options usually occur in increments of ________ and bracket the current stock price.

Correct Answer
verified

Which one of the statements about margin requirements on option positions is not correct?

Correct Answer
verified

Correct Answer
verified

Advantages of exchange-traded options over OTC options include all but which one of the following?

Correct Answer
verified

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is ________ in August.

Correct Answer
verified

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

Correct Answer
verified

You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ________ on the investment.

Correct Answer
verified

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Correct Answer
verified

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ________ option.

Correct Answer
verified

Exam 15: Options Markets

A time spread may be executed by ________.

Correct AnswerverifiedShow Answer

The writer of a put option ________.

Correct AnswerverifiedShow Answer

You purchase a call 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 C0 is the original purchase price of the option.

Correct AnswerverifiedShow Answer

A covered call strategy benefits from what environment?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The initial maturities of most exchange-traded options are generally ________.

Correct AnswerverifiedShow Answer

In 1973, trading of standardized options on a national exchange started on the ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following expressions represents the value of a call option to its holder on the expiration date?

Correct AnswerverifiedShow Answer

An American put option gives its holder the right to ________.

Correct AnswerverifiedShow Answer

Exchange-traded stock options expire on the ________ of the expiration month.

Correct AnswerverifiedShow Answer

Exercise prices for listed stock options usually occur in increments of ________ and bracket the current stock price.

Correct AnswerverifiedShow Answer

Which one of the statements about margin requirements on option positions is not correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Advantages of exchange-traded options over OTC options include all but which one of the following?

Correct AnswerverifiedShow Answer

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is ________ in August.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ________ on the investment.

Correct AnswerverifiedShow Answer

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a ________.

Correct AnswerverifiedShow Answer

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ________ option.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

You purchase a call option on a stock. The profit at contract maturity of the option position is ________, where X equals the option's strike price, S_T is the stock price at contract expiration, and C₀ is the original purchase price of the option.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified