Chapter 13

Question 1

With options, what terms are synonymous with buyer?

Answer 1

Owner, holder, long

Question 2

A call option gives the owner the right to _____.

Answer 2

buy

Question 3

With options, what terms are synonymous with seller?

Answer 3

Writer, short

Question 4

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

Answer 4

sell

Question 5

A put option gives the owner the right to ______.

Answer 5

sell

Question 6

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

Answer 6

buy

Question 7

True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.

Answer 7

True

Question 8

Equity options have a contract size of _____ shares.

Answer 8

100

Question 9

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

Answer 9

greater than; up

Question 10

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

Answer 10

below; down

Question 11

True or False: A 60 call with the market at 63 is in-the-money.

Answer 11

True

Question 12

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

Answer 12

False, it is at-the-money

Question 13

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

Answer 13

True

Question 14

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

Answer 14

True

Question 15

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

Answer 15

False, it is in-the-money

Question 16

True or False: A 95 put with the market at 90 is in-the-money.

Answer 16

True

Question 17

What is intrinsic value?

Answer 17

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

Question 18

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

Answer 18

in-the-money

Question 19

What is time value?

Answer 19

The option’s premium minus the intrinsic value.

Question 20

Name three important factors for determining the premium of an equity option.

Answer 20

The stock’s market price versus the strike price, time left until expiration, and volatility of the underlying security

Question 21

Calls and puts are the two ________ of options.

Answer 21

types

Question 22

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

Answer 22

Right to buy at 70

Question 23

Sandra buys 1 ABC Dec 70 Call at 4. What is Sandra’s strategy?

Answer 23

She’s a bull, thinks price will go up

Question 24

Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?

Answer 24

Profit of $6/share, or $600

Question 25

Sandra buys 1 ABC Dec 70 Call at 4. Later at expiration, if ABC has fallen to 67, would Sandra have a gain or a loss?

Answer 25

loss of the premium, $4/share, $400

Question 26

Sandra buys 1 ABC Dec 70 Call at 4. Later ABC rises to 80 and Sandra liquidates the call for 11. What is the result?

Answer 26

A $700 gain. She originally paid 4, but received 11 on the sale, netting a $700 gain.

Question 27

An investor writes 1 DEF May 55 Call at 6. Does she have a right or an obligation?

Answer 27

Obligation to sell at 55

Question 28

An investor writes 1 DEF May 55 Call at 6. What is the investor's strategy?

Answer 28

Bearish, thinks stock will go down

Question 29

An investor writes 1 DEF May 55 Call at 6. Later at expiration, if DEF has fallen to 53, would there be a gain or loss?

Answer 29

Gain of $600 (the premium)

Question 30

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?

Answer 30

A $300 loss since the investor received $600, but paid $900. Closing out means to execute the opposite transaction.

Question 31

The maximum loss for an option buyer is the ____________.

Answer 31

the premium

Question 32

The maximum gain for an option seller is the ____________.

Answer 32

premium

Question 33

True or False: To close (sell) or to exercise for profit, option buyers want contracts to become in-the-money.

Answer 33

True

Question 34

True or False: Option writers want contracts to expire at- or out-of-the-money.

Answer 34

True

Question 35

An investor holds 1 XYZ Jan 80 Put at 5. Does she have a right or an obligation?

Answer 35

Right to sell at 80

Question 36

An investor holds 1 XYZ Jan 80 Put at 5. What is her strategy?

Answer 36

Bearish, thinks stock will drop

Question 37

An investor holds 1 XYZ Jan 80 Put at 5. What is the result if later XYZ falls to 65, and the put is exercised?

Answer 37

Profit of $1,000. $15/share gain, less $5/share premium, gives $10/share gain. Times 100 shares is $1,000 profit

Question 38

Bill writes 1 DEF May 55 Call at 6. Later DEF rises to 70 and the call is exercised, what is Bill's result?

Answer 38

loss of $900, the premium brings the at-the-money price to 61. 9 over that, for $900

Question 39

An investor holds 1 XYZ Jan 80 Put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?

Answer 39

loss of $500, the premium

Question 40

Long 1 XYZ Jan 80 Put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?

Answer 40

A $750 gain. The investor originally paid $500, but then received $1,250, netting a $750 gain.

Question 41

Jim is short 1 MNO Aug 40 Put at 4.50. Does Jim have a right or an obligation?

Answer 41

Obligation to buy at 40

Question 42

Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim's strategy?

Answer 42

Bullish, thinks stock will go up

Question 43

Short 1 MNO Aug 40 Put at 4.50. MNO falls to 30, the put is exercised and the stock is immediately sold. Result?

Answer 43

loss of $550. The breakeven is 35.50, but the stock fell 5.50 lower than 35.50.

Question 44

Jim is short 1 MNO Aug 40 Put at 4.50. If MNO rises to 44 at expiration, would Jim have a gain or a loss?

Answer 44

gain of $450 (the premium)

Question 45

Jim shorts 1 MNO Aug 40 Put at 4.50. XYZ later falls to 32 and Jim liquidates at the intrinsic value. Result?

Answer 45

loss of $350. Jim originally received $450, but then closed out by paying $800, netting a $350 loss.

Question 46

How would an option order ticket be marked for an investor whose initial transaction was the purchase of a call?

Answer 46

Opening Purchase

Question 47

How would an option order ticket be marked for an investor whose initial transaction was the sale of a put?

Answer 47

Opening Sale

Question 48

To offset an option purchase, an investor would execute a ________________.

Answer 48

closing sale

Question 49

To offset an option sale, an investor would execute a ___________________.

Answer 49

closing purchase

Question 50

True or False: Both the buyer and seller of an option have the right to exercise.

Answer 50

False, only buyers can execute

Question 51

Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much intrinsic value does the option have?

Answer 51

$1.00 or 1 point

Question 52

Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?

Answer 52

$2.00 or 2 points

Question 53

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

Answer 53

$4.00 or 4 points

Question 54

Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?

Answer 54

$1.00 or 1 point

Question 55

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

Answer 55

0, it is at-the-money

Question 56

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

Answer 56

$2.00 or 2 points

Question 57

Consider the following: TNT Jun 80 call at 3 If TNT is trading at 78, how much intrinsic value does the option have?

Answer 57

0, it is out-of-the-money

Question 58

Consider the following: TNT Jun 80 Call at 3 If TNT is trading at 78, how much time value does the option have?

Answer 58

$3.00 or 3 points

Question 59

True or False: Option sellers want contracts to expire at-the-money or out-of-the-money.

Answer 59

True

Question 60

What is an uncovered call position?

Answer 60

The sale of a call (obligation to sell) without owning the stock

Question 61

What is the breakeven point? Buy 1 XYZ Jan 55 Call at 5.10

Answer 61

60.10

Question 62

What is the breakeven point? Sell 1 RFQ Feb 85 Call at 2.70

Answer 62

87.7

Question 63

What is the breakeven point? Long 1 MNO March 40 Put at 1.00

Answer 63

39

Question 64

What is the breakeven point? Short 1 XYZ Apr 70 Put at 2.80

Answer 64

67.20

Question 65

What is the maximum profit? Buy 1 RFQ May 35 Call at 2.50

Answer 65

it is unlimited

Question 66

What is the maximum gain? Write 1 MNO June 60 Call at 3.60

Answer 66

$360.00, the premium

Question 67

What is the maximum profit? Long 1 XYZ July 115 Put at 4.20

Answer 67

$11,080. If goes down to $0 get $115 minus $4.20/share

Question 68

What is the maximum gain? Sell 1 RFQ Aug 50 Put at 4.10

Answer 68

$410, the premium

Question 69

What is the maximum risk? Buy 1 MNO Sep 60 Call at 6.70

Answer 69

$670

Question 70

What is the maximum loss? Short 1 XYZ Oct 110 Call at 4.80

Answer 70

unlimited

Question 71

What is the maximum risk? Long 1 RFQ Nov 70 Put at 6.90

Answer 71

$690

Question 72

What is the maximum loss? Sell 1 MNO Dec 65 Put at 5.30

Answer 72

$5,970. $65/share minus $5.30 equals $59.70/share

Question 73

Define a series of options.

Answer 73

All options with the same underlying interest, expiration month, strike price and type (e.g. ABC May 60 Call)

Question 74

Define a class of options.

Answer 74

All options with the same underlying interest and the same type (e.g. STC calls or STC puts)