Chapter 12

Question 1

Intrinsic Value =

Answer 1

Market price - strike price

Must be IN-the-money to have intrinsic value

Question 2

Time Value =

Answer 2

Premium - Intrinsic Value

Question 3

A holder of a _____ will receive the dividend on the underlying security as long as the option is exercised before the ex-deividend date.

Answer 3

call option

Question 4

A holder of a _____ who holds the underlying stock must wait to exercise the option until the ex-dividend date or after to retain the dividend.

Answer 4

put option

Question 5

When buying call options, the maximum gain is _____ and the maximum loss is_____.

Answer 5

unlimited; premium paid

Question 6

When buying put options, the maximum gain is _____ and the maximum loss is _____.

Answer 6

strike price - premium x 100 shares; premium paid

Question 7

When selling call options, the maximum gain is _____ and the maximum loss is_____.

Answer 7

premium received; unlimited

Question 8

When selling put options, the maximum gain is _____ and the maximum loss is _____.

Answer 8

premium received; strike price - premium x 100 shares

Question 9

An investor buys 10 ABC May 60 calls and holds another 10 ABC May 60 puts. This represents a:

Answer 9

Long Straddle

Question 10

An investor writes 10 ABC May 60 calls and sells another 10 ABC May 60 puts. This represents a:

Answer 10

Short straddle

Question 11

An investor buys 10 ABC May 60 calls at 3 and holds another 10 ABC May 50 puts at 1. This represents a:

Answer 11

Combination

Question 12

An investor buys 1 ABC May 60 call and writes 1 ABC May 50 call. This represents a:

Answer 12

Price Spread

Question 13

An investor buys 1 ABC May 60 call and sells another 1 ABC July 60 call. This represents a:

Answer 13

Time spread

Question 14

An investor buys 1 ABC May 40 call and writes another 1 ABC July 50 call. This represents a:

Answer 14

Diagonal Spread

Question 15

When analyzing an option spread, the dominant leg has the:

Answer 15

Largest premium

Question 16

A LEAP is:

Answer 16

A long-term equity option (maturity of up to 39 months)

Question 17

An investor sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is this position?

Answer 17

Short Combination

Question 18

An option order ticket for an investor with an initial transaction being a sale of a put would be marked as a(n):

Answer 18

opening sale

Question 19

An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. What is the investors breakeven point?

Answer 19

47 - 3 = 44

Question 20

Mark sold an 80 put at 7 and was later exercised against. What is Mark’s cost basis?

Answer 20

80 - 7 = 73

Question 21

An investor purchases a PRT Oct 45 call @ 3. When PRT is selling at 51, the investor exercises the call. The investor has a:

Answer 21

Cost basis of 48 because the investor has not yet sold the stock

Question 22

An investor will buy VIX puts if he expects an _____ in the volatility of the S&P 500 Index

Answer 22

decrease