Basic Option Valuation

Question 1

When are calls and puts at the money, near the money, in the money and out of the money?

Answer 1

Calls and puts are at the money when S=X (or near the money S~X).
Calls are in the money when S>X and puts are in the money when S<X.
Calls are out of the money when S<X>X.</X>

Question 2

What is the absolute minimum and maximum values of a call?

Answer 2

Minimum value of a call is zero, maximum value of call is the S underlying value.

Question 3

What is the absolute minimum value and maximum value of a put?

Answer 3

Minimum value of put is 0 and maximum is strike/exercise price X.

Question 4

What is the maximum loss on a call or put based on high values of volatility?

Answer 4

The maximum loss for both a call and a put is the amount paid in premium for either contract.

Question 5

What is the impact of higher interest rates and puts and calls?

Answer 5

High interest rates increase the value of call options and decrease the value of put options.

Question 6

In the binomial model, if the call price in the market is higher than the call price given by the model you should….?

Answer 6

Buy the stock and sell the call

Question 7

An investor who owns a call option can close out the position of any of the following types of transactions except
- Exercise
- offset
- Buying a put
- Expiring out of the money

Answer 7

Buying a put

Question 8

An investor who owns a call option can close out the position of any of the following types of transactions except
- Exercise
- offset
- Buying a put
- Expiring out of the money

Answer 8

Buying a put

Question 9

At expiry a European put option will be valuable if the exercise price is …
- Equal to the underlying price
- Greater than the underlying price
- It is not possible to determine
- Less than the underlying Price

Answer 9

Greater than the underlying price

Question 10

For European call option with two months until expiration if the spot price is below the exercise price the call option will most likely have..
- 0 time value
- negative time value
- Positive exercise value
- Positive time value

Answer 10

Positive time value

Question 11

Binomial Prwill theoretically equal the black scholes model price under which of the following conditions?
- when the option is in the money
- when the option is at the money
- When the number of time periods is large
- When the implied volatilities is the same

Answer 11

When the number of time period is large

Question 12

What is a straddle in options trading?

Answer 12

A strategy that involves buying both a call and a put option on the same underlying asset with the same strike price and expiration date