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SIE > Ch. 10 Options > Flashcards

Ch. 10 Options Flashcards

1
Q

The maximum expiration for standard equity options is ____ months.

A

The maximum expiration for standard equity options is 9 months.

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2
Q

By what time must equity options be exercised?

A

5:30 p.m. ET on the third Friday of the expiration month

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3
Q

Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much intrinsic value does the option have?

A

0, it is at-the-money

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4
Q

An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. Is the investor bullish or bearish on IBM?

A

Bullish since they are long the stock. The put is purchased to protect downside risk.

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5
Q

When may European-Style options be exercised?

A

Only at expiration

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6
Q

A call option is in-the-money when the market price is ____________ the strike price.

A

Above

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7
Q

The maximum loss for an option buyer is the ____________.

A

Premium

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8
Q

Consider the following: ABC Sep 45 Put at 6 If ABC is trading at 41, how much intrinsic value does the option have?

A

$4.00 or 4 points

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9
Q

What is intrinsic value?

A

The amount by which the option is in-the-money

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10
Q

With options, what terms are synonymous with buyer?

A

Owner, holder, long

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11
Q

Options will only have intrinsic value if they are ____-the-money.

A

In-the-money

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12
Q

Is Sandra Bearish or Bullish? Sandra buys 1 ABC December 70 Call at 4.

A

Bullish

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13
Q

An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the investor’s breakeven point?

A

35 + 3 = 38 (short sale proceeds + premium received)

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14
Q

What positions would be appropriate for an investor who is bullish on the S&P 500 Index?

A

Buy SPX (S&P 500) Calls or Sell SPX (S&P 500) Puts

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15
Q

Sandra buys 1 ABC Dec 70 Call at 4. Does Sandra have a right or an obligation?

A

Right to buy at 70

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16
Q

True or False: An investor may buy calls to speculate on a stock going up in price or to hedge a short position.

A

True

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17
Q

True or False: A 110 call with the market at 108 is out-of-the-money.

A

True

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18
Q

True or False: Covered call writing is a conservative option strategy that is designed to generate income.

A

True

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19
Q

True or False: A 60 put with the market at 60 is at-the-money.

A

True

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20
Q

An investor buys an OEX May 475 call at 10. What is his maximum loss?

A

The premium of $1,000 (the value of 10 x $100)

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21
Q

An investor holds 1 XYZ January 80 Put at 5. What is her breakeven point?

A

80 - 5 = 75 (strike price minus premium or PUT DOWN)

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22
Q

Put sellers are bearish or bullish?

A

Bullish

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23
Q

If exercised against, the writer of an equity put option is obligated to ____ the underlying stock.

A

Buy

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24
Q

True or False: A 95 call with the market at 95 is in-the-money.

A

False, it is at-the-money.

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25
True or False: A 95 put with the market at 90 is in-the-money.
True
26
At what time do equity options stop trading?
4:00 p.m. ET on the third Friday of the expiration month
27
When must a firm provide a copy of the Option Disclosure Document (ODD) to a client?
At or prior to account approval
28
True or False: A 110 put with the market at 108 is out-of-the-money.
False, in-the-money
29
By selling a call and receiving the premium, covered call writers sacrifice the stock's future ________ potential.
Upside potential
30
The maximum gain for an option seller is the ____________.
Premium
31
If long stock, a put option can be used to limit ___________ risk.
Downside
32
A put option is in-the-money when the market price is ____________ the strike price.
Below
33
What is a covered call position?
The sale of a call (obligation to sell) against stock that is owned
34
What is an uncovered call position?
The sale of a call (obligation to sell) without owning the stock
35
A call option gives the owner the right to _____.
A call option gives the owner the right to buy, but not the obligation
36
A put option gives the owner the right to ______.
Sell, but not the obligation to sell
37
Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim's strategy?
Bullish
38
If an investor is short a call, how could that option be covered?
1) Be long 2) Own convertibles 3) Present escrow receipt 4) Own a call (lower strike, same or later expiration)
39
An investor buys an OEX May 475 call at 10. What is his breakeven point?
475 + 10 = 485 (strike price plus the premium or CALL UP)
40
The ___________________________ issues and guarantees option contracts.
The Options Clearing Corporation (OCC) issues and guarantees option contracts.
41
Name three important factors for determining the premium of an equity option.
The stock's market price versus the strike price, time left until expiration, and volatility of the underlying security
42
True or False: A 60 call with the market at 63 is in-the-money.
True
43
What are two uses of index options?
Speculate or hedge
44
True or False: Option writers want contracts to expire at- or out-of-the-money.
True. For options at- or out-of-the-money, the seller would retain the premium (maximum gain).
45
Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much time value does the option have?
$2.00 or 2 points
46
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?
$2.00 or 2 points
47
Consider the following: TNT Jun 80 call at 3 If TNT is trading at 78, how much intrinsic value does the option have?
0 as it is out-of-the-money
48
Write 1 DEF May 55 Call at 6. DEF rises to 63 and the investor closes the position at a premium of 9. What's the result?
A $300 loss since the investor received $600, but paid $900. Closing out means to execute the opposite transaction.
49
What are the specifics regarding the expiration of equity options?
They expire at 11:59 p.m. ET on the third Friday of the expiration month.
50
Is there any difference between the exercise of an index option and an equity option?
Yes, index options are cash-settled while equity options are settled by delivery of a specific security.
51
An investor writes 1 DEF May 55 Call at 6. What is the investor's strategy?
Bearish
52
Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?
$1.00 or 1 point
53
Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much intrinsic value does the option have?
$1.00 or 1 point
54
Sandra buys 1 ABC December 70 Call at 4. What is Sandra's breakeven point?
70 + 4 = 74 (strike price + premium or CALL UP)
55
An investor holds 1 XYZ Jan 80 Put at 5. Does she have a right or an obligation?
Right to sell at 80
56
An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the investor's breakeven point?
30 - 2 = 28 (cost of the stock - the premium received)
57
True or False: Both the buyer and seller of an option have the right to exercise.
False. Only buyers can exercise the contract.
58
If exercised against, the writer of an equity call option is obligated to _____ the underlying stock.
Sell
59
True or False: An investor who is long 100 shares of ABC stock and long an ABC put is bearish on the stock.
False. The purchase of the put is designed to protect against downward price movement.
60
Call buyers and put writers are __________.
Bullish
61
If short stock, a call option can be used to limit _________ risk.
Upside risk (loss)
62
An investor holds 1 XYZ January 80 Put at 5. What is her strategy?
Bearish
63
True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.
True
64
An investor writes 1 DEF May 55 Call at 6. What is the breakeven point?
55 + 6 = 61 (strike price + premium or CALL UP)
65
What is time value?
The option's premium minus the intrinsic value.
66
Equity options have a contract size of _____ shares.
100 shares
67
Jim is short 1 MNO August 40 Put at 4.50. What is Jim's breakeven point?
40 - 4.50 = 35.50 (strike price minus the premium or PUT DOWN)
68
Consider the following: TNT Jun 80 Call at 3 If TNT is trading at 78, how much time value does the option have?
$3.00 or 3 points (can't have negative intrinsic value)
69
Identify the acronym: OCC
Options Clearing Corporation
70
Call sellers are __________.
Bearish
71
Investors who want to generate income on a stock position should ______ an option.
Sell (write)
72
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. Is the investor bullish or bearish on XYZ?
Bearish since the investor is short the stock. The call is purchased to protect upside risk.
73
Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?
A $600 profit since the investor is bullish and the stock rose 6 points above the breakeven point of 74.
74
When may American-Style options be exercised?
On any business day up to the expiration date
75
To protect a long position, an investor would _____ a _____ option as a hedge.
Buy a put option
76
A mutual fund portfolio manager wanting to generate income would engage in what option strategy?
Covered call writing
77
An investor buys an OEX May 475 call at 10. What is his strategy?
Bullish
78
Jim is short 1 MNO Aug 40 Put at 4.50. Does Jim have a right or an obligation?
Obligation to buy at 40

SIE (20 decks)

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