Chapter 5: Options Contracts

Question 1

______ are legally binding contracts between buyers and sellers.

Answer 1

Options

Question 2

The option holder has the ______ (______ option) or the ______ (______option) a(n) ______ (100 shares) of the underlying security at a specified price, known as the “______” or “______” price.

Answer 2

1. Right to Buy (Call Option)
2. Right to Sell (Put Option)
3. Round Lot
4. Strike
5. Exercise

Question 3

The buyer of an option is called the “______”.

Answer 3

Holder

Question 4

______ are valid for a specified period of time; consequently, the ______ has a definite start and expiration date after which the ______ itself is worthless.

Answer 4

Option(s)

Question 5

An option buyer (holder) pays a(n) ______ (option price) for the ______, but not the ______, to exercise the option within a specified time period.

Answer 5

1. Premium
2. Right
3. Obligation

Question 6

If the option holder chooses to exercise the option, then the ______ (seller) of the option contract is ______ to buy or sell the security at the strike price.

Answer 6

1. Writer

2. Obligated

Question 7

The ______ standardizes options contracts so they can trade on exchanges. It sets strike prices, expiration dates, contract sizes, and is the issuer and clearing agent for listed options. It is owned by the ______ that trade options.

Answer 7

1. Options Clearing Corporation (OCC)

2. Exchanges

Question 8

There are two types of options contracts: ______ and ______.

A(n) ______ of options consists of options of the same type on the same underlying security.

A(n) ______ of options consists of options of the same class that also have the same expiration date.

The exercise style of the option: ______ or ______.

The ______ is the price of an option.

The ______ or ______ price is the price at which an option can be exercised.

Answer 8

1. Puts and Calls
2. Class
3. Series
4. American or European
5. Premium
6. Strike or Exercise

Question 9

The ______ has a long position in option, pays the premium (price), and has the right to exercise the option.

Answer 9

Option Holder

Question 10

The ______ has a short position in the options, sells a put or call that they don’t own, collects the premium (price), and has the obligation to buy or sell the underlying security if it is exercised.

Answer 10

Option Writer

Question 11

The ______ is the day on which the option contract ceases to exist or becomes worthless. At ______, options are either exercised or expire.

Answer 11

1. Expiration Date

2. Expiration

Question 12

Equity options expire on the ______ at ______. This is the last trading day, unless it is a holiday, in which case expiration and the last trading day will fall on the ______ of the expiration month.

Answer 12

1. Third Friday of the Month
2. 11:59 P.M. Eastern Time
3. Third Thursday

Question 13

______ are negotiated options that trade in the OTC market. They are not standardized or listed on an exchange. ______ are often used by portfolio managers to help them hedge or protect their portfolios, because these options can be custom-designed to meet the portfolio’s needs at a specific time.

Answer 13

1. Over-The-Counter (OTC) Options

2. OTC Options

Question 14

A(n) ______ is a contract that gives the call holder the right to purchase 100 shares of the underlying security, at the strike price (also called the exercise price), until expiration.

Answer 14

Call Option

Question 15

A call holder does NOT receive ______ on the underlying security or have ______.

Answer 15

1. Dividends

2. Voting Rights

Question 16

The call holder has the ______, but is not ______, to exercise the option within a specified period of time. A call holder pays the ______ for the call.

Answer 16

1. Right
2. Obligated
3. Premium

Question 17

A call writer sells the call ______. He has the ______ to sell 100 shares of the underlying security at the ______ price, until expiration. The call writer receives the ______.

Answer 17

1. Short
2. Obligation
3. Strike
4. Premium

Question 18

Call Holder:

1. ______ Calls
2. ______ Premium
3. ______ to BUY or SELL

Call Writer:

4. ______ Calls
5. ______ Premium
6. ______ to BUY or SELL

Answer 18

1. Long
2. Pays
3. Right to BUY
4. Short
5. Receives
6. Obligation to SELL

Question 19

If the call writer does not own the underlying security that he is obligated to sell at expiration for a predetermined price, he could have a(n) ______ if the price of the security increases substantially. This is because the investor would be required to buy the security at the higher current market price and sell it to the call holder at the lower strike price.

Answer 19

Unlimited Potential Loss

Question 20

A ______ has the right to sell 100 shares of the underlying security at the strike price (also called the exercise price), until expiration. The ______ pays the premium (price) for the put.

Answer 20

Put Holder

Question 21

A ______ sells the put short. He has the obligation to buy 100 shares of the underlying security at the strike price, until expiration. The ______ receives the premium.

Answer 21

Put Writer

Question 22

Put Holder:

1. ______ Puts
2. ______ Premium
3. ______ to BUY or SELL

Put Writer:

4. ______ Puts
5. ______ Premium
6. ______ to BUY or SELL

Answer 22

1. Long
2. Pays
3. Right to SELL
4. Short
5. Receives
6. Obligation to BUY

Question 23

The main components of an option contract are the underlying ______, the ______ date, the ______ of option, and the ______ price.

Answer 23

1. Security
2. Expiration
3. Type
4. Strike

Question 24

ABC June 30 call at $1.50

ABC = \_\_\_\_\_\_
June = \_\_\_\_\_\_
30 = \_\_\_\_\_\_
Call = \_\_\_\_\_\_
$1.50 = \_\_\_\_\_\_

Answer 24

ABC = Underlying Security
June = Expiration Month
30 = Strike Price
Call = Type of Option
$1.50 = Premium

Question 25

The option ______ is not part of the contract. It is the price of the option and fluctuates with the price of the ______ and the time remaining until ______.

Answer 25

1. Premium
2. Underlying Security
3. Expiration

Question 26

Equity option contracts are for ______ shares of the underlying stock, so you multiply the premium by ______ to get the total premium for the option.

Answer 26

100

Question 27

The option ______ (______) pays the premium and the option ______ (______) collects the premium.

Answer 27

1. Holder (Buyer)

2. Writer (Seller)

Question 28

______ style options can be exercised at any time up to the cut-off time on expiration day.

Answer 28

American

Question 29

______ style options can only be exercised during a specific time period, usually the last trading day before expiration.

Answer 29

European

Question 30

Domestic options on individual stocks, such as Apple, IBM, or Google, are typically ______ style. All domestic equity monthly options expire on the ______ at ______.

Answer 30

1. American
2. Third Friday of the Month
3. 11:59 P.M. ET

Question 31

Options on stock indexes are generally ______ style. Examples include options on the S&P 500, NASDAQ, or Russell 2000.

Answer 31

European

Question 32

______-style options are usually more expensive than ______-style options.

Answer 32

1. American

2. European

Question 33

The seller of a(n) ______-style option is assuming more risk because the option buyer can exercise the option at any time. Conversely, ______-style options can only be exercised at expiration, which makes them less expensive. Knowing exactly when the option will be exercised involves less ______ for the option seller.

Answer 33

1. American
2. European
3. Risk

Question 34

When option holders want to exercise, they must notify their B/D, who in turn notifies the OCC. The OCC assigns a B/D who is short the option contracts that are being exercised, and the B/D notifies a customer with a short position in those options. This is called ______, ______, or ______.

Answer 34

1. Being Assigned
2. Assignment
3. Receiving Notice of Exercise

Question 35

The OCC assigns broker/dealers at ______ and broker/dealers can assign their customers at ______, on a first in - first out basis, or any other way that is “fair and reasonable.”

Answer 35

Random

Question 36

______ are nearly identical to conventional equity options except that they represent 10 shares of the underlying security, whereas traditional options represent 100 shares.

Answer 36

Equity Mini-Options

Question 37

The lower costs of ______ provide a way for investors to participate in the movements of high-priced stocks while buying even just a few shares of a single, expensive traditional option.

Answer 37

Mini-Options

Question 38

______ are stock or index options with expiration dates out to 39 months.

Answer 38

Long-Term Equity Anticipation Securities (LEAPS)

Question 39

Only long ______ can result in long-term capital gain or losses. These occur when ______ are held for a period greater than 12 months. Capital gains and losses resulting from a 12-month or shorter holding period are classified as ______.

Answer 39

1. Long-Term Equity Anticipation Securities (LEAPS)
2. LEAPS
3. Short-Term

Question 40

Conventional options have a(n) ______ life, which always results in ______ capital gains or losses if the option expires or the position is closed.

Answer 40

1. 9-Month

2. Short-Term

Question 41

______ premiums tend to increase in value when the underlying stock price rises, especially as the price of the underlying stock approaches and goes through the strike price.

Answer 41

Call

Question 42

Investors who are long ______ are ______ on the underlying stock, which means the investor wants the price of the underlying stock to go up.

Answer 42

1. Calls

2. Bullish

Question 43

______ premiums go down in value when the underlying stock goes lower.

Answer 43

Call

Question 44

______ premiums increase in value when the underlying stock goes down in price, especially as the price of the underlying stock approaches and goes through the strike price.

Answer 44

Put

Question 45

Investors who are long ______ are ______ on the underlying stock, which means that the investor wants the price of the underlying stock to go down.

Answer 45

1. Puts

2. Bearish

Question 46

______ lose value when the underlying stock rises in price.

Answer 46

Puts

Question 47

______ are made up of time value and intrinsic value. In equation for, this relationship looks like this:

______ = Intrinsic Value + Time Value

Answer 47

1. Options Premiums (Prices)

2. Premium

Question 48

The ______ of an option is determined by how much time there is until the expiration date. The more time there is until expiration, the more ______ in the option; the less time until expiration, the less ______.

Answer 48

Time Value

Question 49

The time value of an option “______” the closer it is to the expiration date. Options are ______ assets.

Answer 49

1. Erodes

2. Wasting

Question 50

A(n) ______ has intrinsic value when the price of the underlying security is higher than the strike price of the call.

Answer 50

Call

Question 51

A(n) ______ has intrinsic value when the price of the underlying security is lower than the strike price of the put.

Answer 51

Put

Question 52

When an option is “______,” it has intrinsic value. Only ______ options are exercised.

Answer 52

In The Money

Question 53

A(n) ______ is in the money when the price of the underlying security is higher than the strike price… think “______”.

Answer 53

1. Call

2. Call Up

Question 54

A(n) ______ is in the money when the price of the underlying security is lower than the strike price of the put… think “______”.

Answer 54

1. Put

2. Put Down

Question 55

Intrinsic Value of a ______ Option = Strike Price - Price of Underlying Security

Intrinsic Value of a ______ Option = Price of Underlying Security - Strike Price

Answer 55

1. Put

2. Call

Question 56

The ______ of an in the money option is equal to the difference between the premium and the intrinsic value.

______ = Premium - Intrinsic Value

Answer 56

Time Value

Question 57

An option is “______” when the market price of the underlying security is the same as the option strike price.

Answer 57

At The Money

Question 58

The premium of an “at the money” option is made up entirely of ______. An “at the money” option has no ______.

Answer 58

1. Time Value

2. Intrinsic Value

Question 59

A(n) “______” option has no intrinsic value. The premium of an “______” option is made up entirely of time value.

Answer 59

Out Of The Money AND At The Money

Question 60

A call option is out of the money when the current price of the underlying security is ______ than the strike price of the call.

Answer 60

Lower

Question 61

A put option is out of the money when the current price of the underlying security is ______ than the strike price of the put.

Answer 61

Higher

Question 62

An option is at ______ with the underlying stock when the option premium has intrinsic value ONLY. For example, XYZ stock is $62.50, and the XYZ Jan 50 call is $12.50.

Answer 62

Parity

Question 63

ABC common stock is trading at $50 per share. The ABC April 45 call has a premium of $7. What is the:

1. Intrinsic value: ______
2. Time value: ______

Answer 63

1. $5
2. $2

The price of ABC is higher than the strike price of the call, so the call is “in the money.”

$50 (market price) - $45 (strike price) = $5 (intrinsic value)

$7 (premium) - $5 (intrinsic value) = $2 (time value)

Question 64

LMN is trading at $23 per share. The Dec 25 put has a premium of $2.75. What is the:

1. Intrinsic value: ______
2. Time value: ______

Answer 64

1. $2
2. $0.75

The price of LMN is lower than the strike price, so the put is “in the money.”

$25 (strike price) - $23 (market price) = $2 (intrinsic value)

$2.75 (premium) - $2 (intrinsic value) = $0.75 (time value)

Question 65

Options are issued with a range of expiration dates called ______, of which there are three:

1. JAN / APR / JUL / OCT (1, 4, 7, 10)
2. FEB / MAY / AUG / NOV (2, 5, 8, 11)
3. MAR / JUN / SEP / DEC (3, 6, 9, 12)

Answer 65

Cycles

Question 66

Actively traded options on ______ may have monthly and even weekly expiration dates in the near term months.

Answer 66

Large Cap Stocks

Question 67

______ options have more time value than ______ options, simply because there is more time for the underlying stock to move enough to make the option increase in value.

Answer 67

1. Far-Dated

2. Near-Dated

Question 68

Options on volatile stocks will have ______ premiums because volatility increases the likelihood that the stock will move enough for an option to end up in the money.

Answer 68

Higher

Question 69

Rising interest rates tend to ______ premiums because of ______, meaning that the money could be invested elsewhere, such as in debt instruments.

Answer 69

1. Increase

2. Opportunity Cost

Question 70

Options on each underlying security are issued with a range of ______. Intervals for equity options can be ______, ______, ______, or ______ points apart.

Answer 70

1. Strike Prices

2. 1, 2.50, 5, or 10 points

Question 71

For calls on the same underlying security with the same expiration date, the ______ the call strike price, the ______ the premium.

Answer 71

1. Lower

2. Higher

Question 72

For puts on the same underlying security with the same expiration date, the ______ the put strike price, the ______ the premium.

Answer 72

1. Higher

2. Higher

Question 73

The ______ is the largest options exchange.

1. Equity options trade from ______ until ______ Eastern time.
2. Options trades settle ______.
3. Premiums must be ______; they cannot be purchased on ______.
4. The volume of positions in options on any given day will adjust the options ______, which is the number of options contracts open on any given security.

Answer 73

1. Chicago Board Options Exchange (CBOE)
2. 9:30 AM to 4:00 PM
3. Next Business Day (T+1)
4. Paid In Full
5. Margin
6. Open Interest

Question 74

When an investor enters an order to buy or sell an option contract, the investor must indicate if the order is a(n) ______ transaction or a(n) ______ transaction.

Answer 74

1. Opening

2. Closing

Question 75

A(n) ______ transaction establishes a new option position or adds to an existing position. This transaction can be buy or sell orders.

Answer 75

Opening

Question 76

A(n) ______ closing transaction closes out or reduces an existing options position. This transaction can be buy or sell orders.

Answer 76

Closing

Question 77

A(n) ______ order establishes a long position in the options (puts or calls).

Answer 77

Opening Purchase

Question 78

A(n) ______ order establishes a short position in the options.

Answer 78

Opening Sell

Question 79

When you write puts and calls, your order is a(n) ______.

Answer 79

Opening Sell

Question 80

When the long position is sold, the order is a(n) ______.

Answer 80

Closing Sell

It closes out the long position.

Question 81

When an option writer covers his position by buying back his short option position, the order is a(n) ______.

Answer 81

Closing Purchase

Question 82

Equity Options expire at ______ on the ______ of the ______.

Answer 82

1. 11:59 PM ET
2. Third Friday
3. Expiration Month

Question 83

Expiring options stop trading at ______ on the third Friday of the expiration month. Even though options don’t expire until Friday at 11:59 PM ET, the ______ must receive notice of exercise from broker/dealers on Friday no later than ______.

Answer 83

1. 4:00 PM ET
2. Options Clearing Corporation (OCC)
3. 5:30 PM ET

Question 84

To protect investors, the ______ will automatically exercise expiring options that are in the money by ______ or more. If investors don’t want their in-the-money options to be exercised, they must notify their ______, who must notify the ______ by the exercise deadline.

Answer 84

1. Options Clearing Corporation (OCC)
2. $0.01
3. Brokerage Firm
4. OCC

Question 85

When call holders exercise a call, they ______ stock at the strike price.

Answer 85

Purchase

Question 86

When put holders exercise a put, they ______ stock at the strike price.

Answer 86

Sell

Question 87

If an option holder chooses to exercise his option, the option writer must honor his obligation to ______ (if he is short calls) or ______ (if he is short puts) the underlying security.

Answer 87

1. Sell

2. Buy

Question 88

Investors only exercise options that are ______.

Answer 88

In the Money

Question 89

When ______ holders exercise their options, they will buy the stock at the strike price and the writer must sell the stock at the strike price.

Answer 89

Call

Question 90

When ______ holders exercise their options, they will sell stock at the strike price and the writer must buy the stock at the strike price.

Answer 90

Put

Question 91

Stock trades resulting from option exercise settle ______, or ______.

Answer 91

1. Regular Way

2. T+2

Question 92

A simple way to calculate profit and loss for options positions is to use ______ and ______ in a(n) ______.

Answer 92

1. Debits
2. Credits
3. “T” Account

Question 93

______ represent dollars paid out of the account, and are recorded on the left.

Answer 93

Debits

Question 94

______ represent dollars received into the account, and are recorded on the right.

Answer 94

Credits

Question 95

Purchasing an option or stock creates a(n) ______.

Answer 95

Debit

Question 96

Selling an option or stock results in a(n) ______.

Answer 96

Credit

Question 97

At the end of an option event, total debits are netted with total credits. A net debit represents a(n) ______. A net credit represents a(n) ______.

Answer 97

1. Loss

2. Gain

Question 98

After you close out of an option position, if you have a larger (net) debit, you have a(n) ______. If your credit is larger, you have a(n) ______.

Answer 98

1. Capital Loss

2. Capital Gain

Question 99

Long Call:

1. Maximum Loss: ______
2. Maximum Gain: ______
3. Breakeven Point: _______

Answer 99

1. Maximum Loss: Premium paid.
2. Maximum Gain: Unlimited (there is no limit to how high the price of the stock can rise)
3. Breakeven Point: Price of Underlying Security = Strike Price + Premium Paid

Question 100

The market price of XYZ is $39. Jan purchases an out of the money XYZ Nov 40 call for $3.

1. Jan’s maximum loss is: ______
2. Jan’s maximum gain is: ______
3. Jan’s breakeven point is: ______

Answer 100

1. $300 maximum loss

$3 (premium) x 100 shares = $300

2. Unlimited maximum gain

The price of XYZ could increase to infinity.

3. $43 breakeven point

$40 (strike price) + $3 (premium paid) = $43. The price of the stock would need to reach $43 for Jan to break even.

Question 101

Adam purchased one ABC June 50 call @ $3.50. A month later he sold it for $6. What is his profit or loss?

Answer 101

$250 profit

$6 (sold) - $3.50 (bought) = $2.50
$2.50 x 100 shares = $250

Question 102

Adam writes on ABC June 50 call @ $3.50. A month later, he buys it back at $6. What is his profit or loss?

Answer 102

$250 loss

$3.50 - $6 = -$2.50
-$2.50 x 100 shares = -$250

Question 103

Adam bought one ABC June 30 call @ $2.60 when ABC stock was trading at a market price of $31. Subsequently, ABC stock rose to $38 and Adam exercised his call and sold his stock at $38. What is his profit or loss?

Answer 103

$540 profit

$2.60 (debit) + $30 (debit) - $38 (credit) = -$5.40/share (credit)
-$5.40/share (credit) x 100 shares = $540 (credit)

Question 104

Sally wrote 3 XYZ Oct 50 puts @ $2.25 when XYZ was trading at a market price of $52. At expiration, XYZ is at $57. What is Sally’s profit or loss?

Answer 104

$675 profit

$2.25 x 3 x 100 = $675. The option was not executed since it was not in the money.

Question 105

Jerry wrote 5 XYZ Oct 50 puts @ $2.25 when XYZ was trading at a market price of $52. At October expiration, XYZ is at $45 and Jerry’s puts are exercised. He immediately sold 500 shares of XYZ at $45. What is his profit or loss?

Answer 105

$1,375 loss

$2.25 (credit) + $45 (credit) - $50 (debit) = -$2.75 (debit)
-$2.75 x 5 x 100 = -$1,375

Question 106

When the market price of ABC stock is $25.30, your client writes an ABC Jan 25 call for a premium of $3. Subsequently, ABC stock drops to $23 and the client purchases the short call back for $1.

1. What is the client’s profit or loss?
2. What would the profit or loss be if you client held onto the short call?

Answer 106

1. $200 profit

$3 (credit) + $1 (debit) = $2 (credit)
$2 x 100 shares = $200

2. $300 profit

$3 (credit) x 100 shares = $300. The call is out of the money so is not executed.

Question 107

Investors ______ ______ or ______ when they think that the underlying stock price is going to have little or no price movement. If they are correct, they make money gradually as the time value in the option premium decays as it gets closer to the expiration date.

Answer 107

1. Write
2. Calls
3. Puts

Question 108

Short Call:

1. Maximum Loss: ______
2. Maximum Gain: ______
3. Breakeven Point: _______

Answer 108

1. Maximum Loss: Unlimited (the stock price, in theory, can go up to infinity).
2. Maximum Gain: Premium received.
3. Breakeven Point: Price of Underlying Security = Strike Price + Premium Paid

Question 109

The market price of XYZ is $39. Jan writes an out of the money XYZ Nov 40 call for $3.

1. What is Jan’s maximum gain?
2. What is Jan’s maximum loss?
3. What is the breakeven price?

Answer 109

1. $300 maximum gain

Jan’s maximum gain is the premium received, $3 x 100 = $300

2. Unlimited maximum loss

Jan’s maximum loss is unlimited since XYZ can increase in price infinity.

3. $43 breakeven point

Breakeven Point –> Price of Security = Strike Price + Premium Paid = $40 + $3 = $43

Question 110

If the underlying security continues to rise above the breakeven point, the call ______ will profit and the call ______ will lose.

If the stock drops below the breakeven point, the call ______ will profit up to the amount of the premium received, and the call ______ will lose up to the amount of the premium paid.

Answer 110

1. Holder
2. Writer
3. Writer
4. Holder

Question 111

Long Put:

1. Maximum Loss: ______
2. Maximum Gain: ______
3. Breakeven Point: _______

Answer 111

1. Maximum Loss: Premium paid.
2. Maximum Gain: Strike Price - Premium Paid. The put holder realizes the maximum gain if the underlying stock is $0 at expiration.
3. Breakeven Point: Price of Underlying Security = Strike Price - Premium Paid

Question 112

The market price of XYZ is $39. Jan purchases an out of the money XYZ Nov 35 put for $1.50.

1. What is Jan’s maximum gain?
2. What is Jan’s maximum loss?
3. What is the breakeven price?

Answer 112

1. $3,350 maximum gain

$35 (strike) - $1.50 (premium) = $33.50 x 100 shares = $3,350

2. $150 maximum loss

$1.50 (premium) x 100 = $150

3. $33.50 breakeven point

$35 (strike) - $1.50 (premium) = $33.50

Question 113

Short Put:

1. Maximum Loss: ______
2. Maximum Gain: ______
3. Breakeven Point: _______

Answer 113

1. Maximum Loss: Strike Price - Premium Received. The put writer incurs maximum loss if the stock is 0 at expiration.
2. Maximum Gain: Premium received.
3. Breakeven Point: Price of Underlying Security = Strike Price - Premium Paid

Question 114

The market price of XYZ is $39. Jan writes an out of the money XYZ Nov 35 put for $1.50.

1. What is Jan’s maximum gain?
2. What is Jan’s maximum loss?
3. What is the breakeven price?

Answer 114

1. $150 maximum gain

$1.50 x 100 = $150

2. $3.350 maximum loss

$35 (strike) - $1.50 (premium) = $33.50
$33.50 x 100 = $3,350

3. $33.50 breakeven point

$35 (strike) - $1.50 (premium) = $33.50

Question 115

If the underlying security continues to rise above the breakeven point, the put ______ will lose and the put ______ profits.

If the stock drops below the breakeven point, the put ______ will lose and the put ______ will profit.

Answer 115

1. Holder
2. Writer
3. Writer
4. Holder

Question 116

Max Gain: Infinity
Max Loss: P
BE: SP + P

Answer 116

Long Call

Question 117

Max Gain: P
Max Loss: Infinity
BE: SP + P

Answer 117

Short Call

Question 118

Max Gain: SP - P –> 0
Max Loss: P
BE: SP - P

Answer 118

Long Put

Question 119

Max Gain: P
Max Loss: SP - P –> 0
BE: SP - P

Answer 119

Short Put

Question 120

Option contracts give both “______” and “______” a way to potentially profit from these anticipated changes in value.

Answer 120

1. Bulls

2. Bears

Question 121

Listed options have a(n) ______ secondary market.

Answer 121

Liquid

Question 122

Option byers are able to ______ investment dollars by buying control of stock for a relatively small ______, resulting in greater profits on the same investment dollars.

Answer 122

1. Leverage

2. Premium

Question 123

Investors also use options to ______ their stock positions. For example, an investor who is long stock can buy ______ on their stock to protect again a sell-off in the stock.

Answer 123

1. Hedge

2. Puts

Question 124

Investors can also use options to ______ by writing options against their stock positions.

Answer 124

Increase Income

Question 125

______ refer to the maximum number of option contracts that an individual, a registered representative managing discretionary accounts, or a group of individuals acting together can have on the ______.

Answer 125

1. Position Limits

2. Same Side of the Market

Question 126

The ______ sets position limits for listed options.

Answer 126

Options Clearing Corporation (OCC)

Question 127

The ______ rules were developed to prevent investors from putting an excessive “bet” on a specific directional move in the market price of a security.

Answer 127

Position Limit

Question 128

Position limits are intended to prevent ______.

Answer 128

Market Manipulation

Question 129

Actively traded large capitalization stocks will have ______ position limits than small capitalization stocks.

Answer 129

Higher

Question 130

Currently, the maximum position limit for the largest capitalized stocks is ______ option contracts on the same side of the market.

Answer 130

250,000

Question 131

______ are restrictions on the number of options contracts on the same side of the market that can be exercised over ______.

Answer 131

1. Exercise Limits
2. 5 Consecutive Business Days

The exercise limit is the same as the position limit.

Question 132

______ are added to put and call positions in determining position limits and exercise limits.

Answer 132

LEAPS (Long Term Equity Anticipation Securities)

Question 133

______ and ______ are on the same side of the market because they are both bullish positions, therefore, they are added together to determine position limits.

Answer 133

1. Long Calls

2. Short Puts

Question 134

Long calls may be referred to as ______ since an opening purchase is a(n) ______ to a customer’s account.

Answer 134

1. Debit Calls

2. Debit

Question 135

Short puts may be referred to as ______ since an opening sell is a(n) ______ to a customer’s account.

Answer 135

1. Credit Puts

2. Credit

Question 136

______ and ______ are on the same side of the market because they are both bearish positions, therefore, they are added together to determine position limits.

Answer 136

1. Long Puts

2. Short Calls

Question 137

Long puts may be referred to as ______ since an opening purchase is a(n) ______ to a customer’s account.

Answer 137

1. Debit Puts

2. Debit

Question 138

Short calls may be referred to as ______ since an opening sell is a(n) ______ to a customer’s account.

Answer 138

1. Credit Calls

2. Credit

Question 139

Market UP = BULLS

Positions: ______, ______, and ______

Answer 139

1. Long Calls [Buy stock, Price Up]
2. Short Puts [Buy stock, Price Up]
3. Long Stock [Own stock, Price Up]

Question 140

Market DOWN = BEARS

Positions: ______, ______, and ______

Answer 140

1. Short Calls [Sell stock, Price Down]
2. Long Puts [Sell stock, Price Down]
3. Short Sales [Sold stock, Price Down]

Question 141

______ that result in a(n) ______ of shares increase the number of options contracts and strike prices are adjusted proportionately lower. The contract size remains the same.

Answer 141

1. Stock Splits

2. Whole Number (2:1)

Question 142

XYZ splits 2:1. One XYZ Nov 40 call contract becomes ______. The contract size remains 100 shares of the underlying security.

Answer 142

2 XYZ Nov 20 Calls

1 (contract) x 2 (split) = 2 contracts
$40 (strike) / 2 (split) = $20 strike

Question 143

XYZ splits 4:1. One XYZ Nov 40 call contract becomes ______. The contract size remains 100 shares of the underlying security.

Answer 143

4 XYZ Nov 10 Calls

1 (contract) x 4 (split) = 4 contracts
$40 (strike) / 4 (split) = $10 strike

Question 144

______ ______ leave the number of contracts the same but increase the number of shares per contract and strike prices are adjusted proportionately lower.

Answer 144

1. Fractional (3:2)

2. Stock Splits

Question 145

ABC splits 3:2. The ABC June 60 call becomes a(n) ______ with a contract size of ______ of the underlying security.

Answer 145

1. ABC June 40 call

2. 150 shares

Question 146

______ and ______ increase option contract size. Strike prices are adjusted proportionately ______.

Answer 146

1. Fractional Stock Splits
2. Stock Dividends
3. Lower

Question 147

______ is an investment strategy that investors use to protect their investments against loss and control risk. It involves reducing risk associated with an investment by using a second investment to offset a potential loss on the first.

Answer 147

Hedging

Question 148

An investor could protect a long stock position by purchasing ______ on the stock that they own. This is known as a(n) ______ purchase.

Answer 148

1. Put

2. Protective Put

Question 149

You buy 100 shares of ABC stock for $41 a share and purchase an ABC June 40 put @ $2.50.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 149

1. Maximum Gain: Unlimited, since you own the stock.
2. Maximum Loss: $350

$41 (bought price) - $40 (put price) = $1 (net loss)
$1 x 100 shares = $100
$2.50 (premium paid) x 100 shares = $250
$100 + $250 = $350

3. $43.50

The breakeven point on the stock occurs when the price of the stock is equal to the price paid for the stock plus the premium paid for the put.

$41 (price paid) + $2.50 (premium) = $43.50

You make money on this position if the stock rises above $43.50 and you lose if the stock is below it.

Question 150

Investors can buy ______ to protect a substantial profit on an established long stock position.

Answer 150

Puts

Question 151

You can protect a short stock position by purchasing ______ on your short stock. This is called a(n) ______ purchase.

Answer 151

1. Calls

2. Protective Call

Question 152

You sell short 100 shares of XYZ stock at $62 and purchase one Sept $65 call for $1.80.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 152

1. Maximum Gain: $6,020

Price stays below $65.
[ $62 (sold price) - $1.80 (premium) ] x 100 shares = $6,020.

2. Maximum Loss: $480

Price rises above $65.
[ $65 (call price) - $62 (sold price) + $1.80 (premium) ] x 100 shares = $480

3. Breakeven Point: $60.20

The breakeven point on the stock is when the price of the stock is equal to the short sale price for the stock less the premium paid for the call.

$62 (sold price) - $1.80 (premium) = $60.2

Question 153

A(n) ______ provides a stock investor with a partial hedge AND income. To establish a(n) ______, an investor ______ options share for share against a stock position and ______ the premium.

Answer 153

1. Covered Write
2. Covered Write
3. Writes
4. Collects

Question 154

An investor who is long stock establishes a(n) ______ by writing calls on a stock position. The calls are “______” because the investor owns the underlying security.

Answer 154

1. Covered Write

2. Covered

Question 155

______ provides income to the investor and creates a partial downside hedge but limits the investor’s potential profit on the stock.

Answer 155

Writing Calls

Question 156

An investor purchases 100 shares of LMN at $43 and writes one LMN Sept $45 call @ $2.25.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 156

1. Maximum Gain: $425

[ $45 (sell) - $43 (bought) + $2.25 (premium) ] x 100 shares = $425

The investor purchased stock at $43. If it rises above $45, the investor is assigned on the short call and has to sell the stock at $45 for a gain of $200. The premium of $225 was received for writing the call.

2. Maximum Loss: $4,075

[ -$43 + $2.25 ] x 100 shares = -$4,075

If LMN goes to zero, then the investor loses the $4,300 paid for the stock less the $225 premium received for writing the call.

3. Breakeven Point: $40.75

$43 (bought price) - $2.25 (premium) = $40.75

The breakeven point on the stock is equal to the price paid for the stock less the premium received for the call.

Below $40.75, the investor loses money, thus writing the call provides only a partial hedge on the downside risk of the stock.

Question 157

If the investor writes a(n) ______ on a stock that pays a dividend, it increases the likelihood of early exercise near or on the dividend record date. If the ______ is in the money, especially if it is at or near intrinsic value, the ______ might exercise the ______ in order to collect the dividend.

Answer 157

1. Covered Call
2. Call
3. Call Holder
4. Call

Question 158

When the dividend is ______ than the time value in the option premium, exercise is ______ likely.

Answer 158

1. Greater

2. More

Question 159

An investor establishes a(n) ______ on a short stock position by writing ______ on a short stock position. Writing ______ provides the investor with income, a partial hedge, and limits the investor’s potential profit on the position.

Answer 159

1. Covered Write
2. Puts
3. Puts

Question 160

An investor sells short 100 shares of ABC at $72 and writes one ABC June 70 put @ $3.35.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 160

1. Maximum Gain: $535

[ $72 (sold price) - $70 (put price) + $3.35 (premium) ] x 100 = $535

2. Maximum Loss: Unlimited, the investor is short stock.
3. Breakeven Point: $75.35

$72 + $3.35 = $75.35

The breakeven point on the stock is equal to the short sale price of the stock plus the premium received for writing the put. If the stock rises above $75.35, the investor loses money and the potential loss is unlimited, thus writing the put provides only a partial hedge on the upside risk of the stock.

Question 161

Remember that to hedge a stock position, you have to establish an options position on the ______ of the market. ______ put and calls provide more protection than ______ which give you a partial hedge and income.

Answer 161

1. Opposite Side
2. Protective
3. Covered Writes

Question 162

Stock Position: Long Stock
Hedge (protective call or put): ______
Partial Hedge (covered write): ______

Answer 162

Hedge: Long Put

Partial Hedge: Short Call

Question 163

Stock Position: Short Stock
Hedge (protective call or put): ______
Partial Hedge (covered write): ______

Answer 163

Hedge: Long Call

Partial Hedge: Short Put

Question 164

Investors who own stock are considered ______, meaning they want the market to go up. In order to provide a hedge, the investor could either buy a(n) ______ (right to sell) or write a(n) ______ (obligation to sell).

Answer 164

1. Bullish
2. Put
3. Call

Question 165

Investors who are short a stock are considered ______, meaning they want the market to go down. To hedge a short position, the investor can either buy a(n) ______ (right to buy) or sell a(n) ______ (obligation to buy).

Answer 165

1. Bearish
2. Call
3. Put

Question 166

______ is the first option position that a new option investor is allowed to do.

Answer 166

Covered Call Writing

Question 167

A(n) ______, in the case of long stock, is when investors write more calls than they have stock. The investor receives more premium but is exposed to unlimited risk on the short call. In the case of short stock, an investor writes more puts than they have short stock.

Answer 167

Ratio Write

Question 168

Long 100 ABC @ $35 and short 2 ABC $40 calls @ $1.25.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 168

1. Maximum Gain: $750, if the stock is $40 at expiration. The investor will keep the $250 premium for the 2 short calls, and make $500 on the stock.

[ $40 (strike) - $35 (bought) + $1.25 (premium) x 2 ] x 100 shares = $750

2. Maximum Loss: Unlimited, there is an uncovered short call.
3. Breakeven Point: $32.50 on the downside. Above $32.50, the investor makes money until the stock reaches $37.50 [$35 + $2.50 (premium received)], and then starts losing on the uncovered short call.

$35 - [ $1.25 (premium) x 2 ] = $32.50

Question 169

Short 100 XYZ @ $53 and short 2 XYZ April 50 puts @ $2.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 169

1. Maximum Gain: $700. At expiration, if the market price of XYZ is $50, the investor makes $300 on the stock and keeps the $400 premium for the two short puts.

[ $53 (short) - $50 (put) + $2 x 2 ] x 100 = $700

2. Maximum Loss: Unlimited, the investor is short stock.
3. Breakeven Point: $57 on the upside. Above $57, the investor loses money on the short stock. Below $49, the investor loses on the uncovered short put.

$53 + $4 = $57 on the upside, $53 - $4 = $49 on the downside

Question 170

Claudette purchases 300 shares of ABC stock @ $24 and writes 3 ABC Jan 25 calls @ $1.75. At January expiration, ABC is $27.50. What is Claudette’s profit or loss?

Answer 170

$825 profit

[ $1.75 (premium) - $24 (buy) + $25 (strike) ] x 300 shares = $825

She purchased stock at $24. She received a premium of $1.75 for her short calls. At expiration, her short calls are exercised and she has to sell her stock at $25.

Question 171

Jay bought 100 shares of XYZ @ $28 and purchased one XYZ Feb 25 put for $0.88. At February expiration, XYZ is $27 and Jay closes out his entire position. What is his profit or loss?

Answer 171

$188 loss

Debits: $28 (buy) + $0.88 (premium)
Credits: $27 (sell)
[ $27 (sell) - $28 (buy) - $0.88 (premium) ] x 100 shares = -$188

Jay lost $188. He bought 100 shares of XYZ at $28; a debit and sold it for $27; a credit. He paid $0.88 for his long put; a debit. At expiration the put was out of the money and expired worthless.

Question 172

Maria sold short 100 shares of ABC @ $52. She bought one ABC April 55 call @ $1.40. ABC falls to $46 and Maria buys back the short stock and sells her long call for $0.32. What is her profit or loss?

Answer 172

$492 profit

Debit: $1.40 (premium), $46 (buy)
Credit: $52 (sold), $0.32 (premium)

[ $52 + $0.32 - $1.40 - $46 ] x 100 shares = $492

Maria made a profit of $492. She shorted stock at $52, a credit, and bought it back at $46, a debit. She paid $1.40 for the long call, a debit, and sold it for $0.32, a credit.

Question 173

A(n) ______ is an options strategy that uses long and short options of the same type - either puts or calls - on the same underlying security.

Answer 173

Spread

Question 174

One type of ______ (price) spread is a(n) ______ spread.

______ means that the investor buys one call and sells another call with a different strike price.

______ means that the investor is establishing the spread for a net debit; money is being paid to establish the spread.

Answer 174

1. Vertical
2. Debit Call
3. Vertical
4. Debit

Question 175

To establish a(n) ______, an investor buys a call with a lower strike price and writes a call with a higher strike price.

Answer 175

Debit Call Spread

Question 176

A debit call spread has ______ risk than owning a call. A debit call spread is a(n) ______ position.

Answer 176

1. Less

2. Bullish

Question 177

Buy one ABC Jan 30 call @ $2.25. Write one ABC Jan 35 call @ 1.00.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 177

1. Maximum Gain: $375

Debit: $30 (buy), $2.25 (premium)
Credit: $35 (sell), $1.00 (premium)

2. Maximum Loss: $125

Debit: $2.25 (premium)
Credit: $1.00 (premium)

3. $30 + $2.25 - $1.00 = $31.25

For a debit call spread, the breakeven point on the stock is equal to the lower strike plus the net premium paid for the spread. The investor loses money below $31.25 and makes money above it.

Question 178

The market price of DEF is $31. Gordon bought 5 DEF Dec 30 calls @ $3.00 and wrote 5 DEF Sept 30 calls for $1.75. At September expiration, DEF is 29 and the Sept 30 calls expire. If Gordon sells his DEF Dec 30 calls for $2, what is his profit or loss?

Answer 178

$375 profit

Debit: $3.00 (premium)
Credit: $1.75 (premium), $2 (premium)

[ $1.75 + $2 - $3 ] x 500 shares = $375

Question 179

A(n) ______ or ______ spread occurs when there is a difference in the expiration date as opposed to the strike prices.

Answer 179

1. Horizontal

2. Calendar

Question 180

Juan thinks that ABC stock is going higher. He wants to buy 5 ABC Feb 40 calls @ $4.25, but he is worried about losing his entire investment of $2,125. To minimize his potential loss, he decides to create a call spread and writes 5 ABC Feb 50 calls @ $1.00, for a net premium of $3.25. A month later, he closes the entire position for $6. What is his profit or loss?

Answer 180

$1,375 profit

Debit: $4.25 (premium)
Credit: $1.00 (premium), $6.00 (premium)

[ $1.00 + $6.00 - $4.25 ] x 500 shares = $1,375

Juan purchased the call spread (he bought the lower strike price call) for a net premium of $3.25 and sold it for a net premium of $6.

Question 181

______ means that the investor is establishing the spread for a net credit; he’s receiving a premium.

Answer 181

Credit

Question 182

To establish a(n) ______, an investor writes the call with the lower strike price and purchases the call with the higher strike price. Because the investor is writing the more expensive call, a(n) ______ is received for the spread.

Answer 182

1. Credit Call Spread

2. Net Premium

Question 183

A credit call spread is a(n) ______ position. The investor wants the underlying security to go ______.

Answer 183

1. Bearish

2. Down

Question 184

Under a(n) ______, the spread loses value or “narrows” as the price of the underlying stock falls to or below the lower strike price call. The investor realizes the maximum gain at expiration if both calls expire and he keeps the premium received.

Answer 184

Credit Call Spread

Question 185

Write one LMN May 50 call @ $7.50. Buy one LMN May 60 call @ $1.50.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 185

1. Maximum Gain: $600, which is the premium received if both options expire.

Credit: $7.50 (premium)
Debit: $1.50 (premium)

[ $7.50 - $1.50 ] x 100 shares = $600

2. Maximum Loss: $400, for a credit call spread is the strike price interval of the spread less the premium received.

Credit: $7.50 (premium), $50 (sell)
Debit: $1.50 (premium), $60 (buy)

[ $7.50 + $50 - $1.50 - $60 ] x 100 shares = -$400

3. Breakeven Point: $56, for a credit call spread, the breakeven point on the stock is equal to the lower strike plus the premium received for the spread. The investor loses money above $56 and makes money below $56.

Question 186

Recently, XYZ stock shot up to 15 points to $43 on takeover rumors. Fred thinks the rumors are wrong and XYZ is going lower. He wants to write a call, but he is concerned about the upside risk, if he’s wrong and XYZ gets bought out at a higher price. He decides to control his risk and put on a credit call spread instead. Fred sells one XYZ March 40 call @ $5 and buys one XYZ March 50 call @ $1.50. A week later, XYZ is $29 and Fred closes his position for a net debit of $0.10. What is Fred’s profit or loss?

Answer 186

$340 profit

Credit: $5 (premium)
Debit: $1.5 (premium), $0.10 (net debit)

$5 - $1.5 - $0.10 = $340

Question 187

To establish a(n) ______, the investor buys a put with a higher strike price and sells a put with a lower strike price.

Answer 187

Debit Put Spread

Question 188

A debit put spread is a(n) ______ position. The investor wans the underlying security to go ______.

Answer 188

1. Bearish

2. Down

Question 189

Under a(n) ______, the spread increases in value or “widens” as the underlying stock falls to and goes through the lower strike price put and the probability of exercise increases. The maximum gain is realized at expiration if both puts are exercised.

Answer 189

Debit Put Spread

Question 190

Buy one XYZ Jan 70 put @ $4.25. Write on XYZ Jan 60 put @ $1.05.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 190

1. Maximum Gain: $680. At January expiration, if XYZ is $60 or lower, he will sell stock at $70 and buy it at $60 for a $1,000 gain less the $320 premium paid for the spread.

Credit: $1.05 (premium), $70 (sell)
Debit: $4.25 (premium), $60 (buy)

$70 + $1.05 - $4.25 - $60 = $6.8 x 100 = $680

2. Maximum Loss: $320, which is the net premium paid assuming both options expire worthless.

Credit: $1.05 (premium)
Debit: $4.25 (premium)

$1.05 - $4.25 = -$3.2 x 100 = -$320

3. Breakeven Point: $66.80. For a debit put spread, the breakeven point on the stock is equal to the higher strike less the net premium paid for the spread. The investor loses money above $66.80 and makes money below it.

$60 + $3.20 (debit spread) = $63.20

Question 191

Under a(n) ______, the investor is establishing the spread for a net credit; premium is received.

Answer 191

Credit Put Spread

Question 192

To establish a(n) ______, an investor writes the put with the higher strike price and purchases the put with the lower strike price.

Answer 192

Credit Put Spread

Question 193

A credit put spread is a(n) ______ position. The investor wants the underlying security to go ______.

Answer 193

1. Bullish

2. Higher

Question 194

Under a(n) ______, the spread loses value or “narrows” as the price of the underlying stock rises to or goes through the higher strike price put. The investor realizes the maximum gain at expiration if both puts are out of the money and expire worthless. If that happens, the investor keeps the premium received.

Answer 194

Credit Put Spread

Question 195

Write one LMN May 50 put @ $5.70. Buy one LMN May 45 put @ $2.40.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point?

Answer 195

1. Maximum Gain: $330, which is the premium received if LMN is above 50 and both puts expire worthless.

Credit: $5.70 (premium)
Debit: $2.40 (premium)

2. Maximum Loss: $170, which for a credit put spread is the strike price interval of the spread less the premium received.

Credit: $45 (sell), $5.70 (premium)
Debit: $50 (buy), $2.40 (premium)

3. Breakeven Point: $46.70

$50 - $5.70 + $2.40 = $46.70

For a credit put spread, the breakeven point on the stock is equal to the higher strike less the premium received for the spread. The investor loses money below $46.70 and makes money above $46.70.

Question 196

Betty wrote one DEF Jan 70 put @ $7 and bought one DEF Jan 60 put @ $1.60. At January expiration, both puts are in the money. What is Betty’s profit or loss?

Answer 196

$460 loss

Credit: $7 (premium), $60 (sell)
Debit: $1.60 (premium), $70 (buy)

$60 + $7 - $70 - $1.60 = -$4.60 x 100 shares = -$460

Question 197

______ are vertical spreads where the investor writes extra of the out of the money options.

Answer 197

Ratio Spreads

Question 198

The investor collects more premium, but also has more risk. A(n) ______ exposes the investor to unlimited upside risk from the uncovered call. A(n) ______ exposes the investor downside risk (strike price - premium received) on the uncovered put.

Answer 198

1. Ratio Call Spread

2. Ratio Put Spread

Question 199

The current market price of ABC stock is $36. Barney thinks ABC stock is going lower and he’d like to buy ABC at $25, so he put on the following ratio spread: Buy 4 ABC June 35 puts @ $2 and write 8 ABC June 25 puts @ $0.25. A month later, the market price of ABC is $24. Barney is exercised on the short puts and he sells his long puts. What is Barney’s new position, and assuming intrinsic value, what is his profit or loss on his options position?

Answer 199

SPREAD:

Credit:
Debit:

SHORT PUTS (4 extra):

Credit:
Debit:

Question 200

The current market price of ABC stock is $36. Barney thinks ABC stock is going lower and he’d like to buy ABC at $25, so he put on the following ratio spread: Buy 4 ABC June 35 puts @ $2 and write 8 ABC June 25 puts @ $0.25. A month later, the market price of ABC is $24. Barney is exercised on the short puts and he sells his long puts. What is Barney’s new position, and assuming intrinsic value, what is his profit or loss on his options position?

Answer 200

Barney is long 800 shares ABC @ $25/share. He profited $3,000 from his options position.

Credit: $0.25x800 (premium), (35-24)x400 (sell)
Debit: $2.00x400 (premium), (25-24)x800 (buy)

$200 + $4,400 - $800 - $800 = $3,000

Question 201

______ have the same expiration date but different strike prices. They can be established with calls or puts. ______ reduce some of the risks associated with buying and writing puts and calls; however, they also reduce the profit potential.

Answer 201

Vertical Spreads

Question 202

______ have the same expiration date but different strike prices. They can be established with calls or puts. ______ reduce some of the risks associated with buying and writing puts and calls; however, they also reduce the profit potential.

Answer 202

Vertical Spreads

Question 203

______ can be established for a debit or credit.

Answer 203

Vertical Spreads

Question 204

A(n) ______, also called a(n) ______ or a(n) ______, is an options strategy wherein an investor writes a near term option and buys far dated option of the same type, with the same strike price on the same underlying security. In other words, the only difference between the two options is the expiration date.

Answer 204

1. Calendar Spread
2. Horizontal Spread
3. Time Spread

Question 205

The investor who purchases a(n) ______ believes that there will be very little volatility on the underlying stock in the near term. If correct, the short term option will lose value at a faster rate than the long far dated option, especially during the month leading up to the expiration when time value tends to erode quickly. If the underlying security is at the strike price when the near term option expires, it will be worthless. Then the investor may choose to continue to hold the long option or sell it.

Answer 205

Calendar Spread / Horizontal Spread / Time Spread

Question 206

A(n) ______ is a call and a put on he same underlying security with the same strike price and the same expiration date.

Answer 206

Staddle

Question 207

The investor buying or writing a(n) ______ is speculating on the volatility of the underlying security.

Answer 207

Straddle

Question 208

The buyer of the ______ expects the underlying security to make a substantial move, but is not sure if the move will be up or down, so the investor buys a put and a call with the same strike price and expiration date.

If the underlying security goes high enough, the investor makes money on the ______; if it goes low enough, the investor makes money on the ______.

Answer 208

1. Straddle
2. Long Call
3. Long Put

Question 209

The seller/writer of a(n) ______ expects little or no volatility in the movement of the underlying security. If correct, the ______ writer makes money because the option premiums will gradually go down in value because of the decline in volatility and the erosion of the time value in the put and call premiums.

Answer 209

Straddle

Question 210

Long Straddle:

1. Maximum Gain: ______
2. Maximum Loss: ______
3. Breakeven Point (Upside): ______
4. Breakeven Point (Downside): ______

Answer 210

1. Unlimited (because a straddle holder is long calls).
2. Premium Paid
3. Upside: Premium of the call and the put added to the call strike price.
4. Downside: Premium of the call and the put subtracted from the put strike price.

Question 211

Short Straddle:

1. Maximum Gain: ______
2. Maximum Loss: ______
3. Breakeven Point (Upside): ______
4. Breakeven Point (Downside): ______

Answer 211

1. Premium Received.
2. Unlimited (because straddle writer is short calls).
3. Upside: Premium of the call and the put added to the call strike price.
4. Downside: Premium of the call and put subtracted from the put strike price.

Question 212

A straddle ______ makes a profit if the underlying security trades above or below the breakeven points.

Answer 212

Holder

Question 213

A straddle ______ makes a profit if the underlying security trades in between the breakeven points.

Answer 213

Writer

Question 214

Assume the market price of XYZ is 50. Thomas expects XYZ to be volatile but is not sure whether it will go up or down. Thomas places an order to buy 10 XYZ August 50 straddles in which is executed as follows:

Buy 10 XYZ August 50 Calls at 3
Buy 10 XYZ August 50 Puts at 3.25

1. What is the breakeven point for the call/upside?
2. What is the breakeven point for the put/downside?
3. What is the maximum profit on the call side?
4. What is the maximum profit on the put side?
5. What is the maximum loss?

Answer 214

1. $56.25 (call/upside) breakeven point

$3.00 + $3.25 = $6.25 total premiums
$50 (call strike) + $6.25 = $56.25

2. $43.75 (put/downside) breakeven point

$50 (put strike) - $6.25 = $43.75

3. Unlimited, the security price could rise to infinity.
4. $43,650, if XYZ goes to zero.

[ $50.00 - $3.00 - $3.35 ] x 10 x 100 shares

5. $6,350 loss if the options expire worthless.

[ $3.00 + $3.35 ] x 10 x 100 shares

Question 215

Assume the market price of XYZ is 50. Thomas expects XYZ to be stable and not swing too far up or down. Thomas places an order to write 10 XYZ August 50 straddles in which is executed as follows:

Write 10 XYZ August 50 Calls at 3
Write 10 XYZ August 50 Puts at 3.25

1. What is the breakeven point for the call/upside?
2. What is the breakeven point for the put/downside?
3. What is the maximum profit?
4. What is the maximum loss on the call side?
5. What is the maximum loss on the put side?

Answer 215

1. $56.25 (call/upside) breakeven point

$3.00 + $3.25 = $6.25 total premiums
$50 (call strike) + $6.25 = $56.25

2. $43.75 (put/downside) breakeven point

$50 (put strike) - $6.25 = $43.75

3. $6,250 gain, if the options expire worthless.

[ $3.00 (premium) + $3.25 (premium) ] x 10 x 100 shares = $6,250

4. Unlimited, shorted call. The price could rise to infinity.
5. $43,750 loss, if the price of XYZ goes to zero.

[ $3.00 (premium) + $3.25 (premium) - 50 (strike) ] x 10 x 100 shares = -$43,750

Question 216

The market price of ABC stock is 41. ABC stock is reporting earnings next week. Kyle thinks the price of ABC will move up substantially on a good earnings report and down substantially on a poor one. He decides to buy 5 ABC Oct 40 straddles @ $4.25 ($2.50 for the calls and $1.75 for the puts). ABC reports excellent earnings and the stock shoots up to 49. Kyle sells his long straddles for $9.75. What is his profit or loss?

Answer 216

$2,750 profit

Credit: $9.75 (sold)
Debit: $4.25 (premiums)

$9.75 - $4.25 = $5.50 x 5 x 100 shares = $2,750

Question 217

The current market price of LMN stock is $24.50. A month ago, Tina bought 200 shares of LMN @ 24. Tina thinks that LMN is going to stay in a narrow trading range for a long time and decides to write 2 Jan 25 straddles @ $3.50 ($1.50 for the calls and $2 for the puts). Surprise! LMN gets bought out for $32 a share. What is Tina’s profit or loss on the entire position at January expiration?

Answer 217

$900 profit

Credit: $3.50 (premiums)
Debit: [ $25 (strike) - $24 (bought) = $1 ] (net change)

[ $3.50 + $1 ] x 2 x 100 shares = $900

Question 218

The market price of XYZ stock is $51.25. Sarah writes 10 XYZ Nov 50 straddles for $5.75 ($3.50 for the calls and $2.25 for the puts). On the Friday before November expiration, XYZ is trading at $50.12 and Sarah’s straddle is @ $0.25 ($0.20 for the calls and $0.05 for the puts). She doesn’t want to get assigned on the short calls (or the short puts, if the stock should fall below 50 before the stock market closes, so she makes a closing purchase of the straddle of @ $0.25. What is her profit or loss?

Answer 218

$5,500 profit

Credit: $5.75 (premiums)
Debit: $0.25 (closing purchase)

$5.75 - $0.25 = $5.50 x 10 x 100 = $5,500

Question 219

Like a straddle, a(n) ______ is a strategy for speculating on the volatility of the underlying stock. A(n) ______ is similar to a straddle in that it involves buying or selling a call and a put on the same underlying stock. However, the contracts have different strike prices and/or different expiration months.

Answer 219

Combination

Question 220

Buy 5 ABC June 45 Calls at $0.75.
Buy 5 ABC June 35 Puts at $0.90.

1. What is the maximum gain?
2. What is the maximum loss?
3. What is the breakeven point on the upside?
4. What is the breakeven point on the downside?

Answer 220

1. Maximum Gain: Unlimited.

The maximum gain for a long combination is unlimited because the combination holder is long calls.

2. Maximum Loss: $825, equal to the combined premiums paid for the puts and calls.

$0.90 + $0.75 (premiums) = $1.65 x 5 x 100 = $825

3. Breakeven Point (call/upside): $46.65
4. Breakeven Point (put/downside): $33.35

$1.65 (premiums) + $45 (call strike) = $46.65

$35 (put strike) - $1.65 (premiums) = $33.35

The holder of this combination will make money if ABC stock goes above $46.65 or below $33.35.

Question 221

The largest option exchange is the ______.

Answer 221

Chicago Board Options Exchange (CBOE)

Question 222

______ are scattered throughout the trading floor where options on stocks, indexes, and other securities trade.

Answer 222

Trading Posts

Question 223

Option orders are transmitted to the trading floor via the CBOE’s ______, which is an automated execution system that allows member firms to transmit option orders directly to the trading post. When these orders are executed, the system automatically notifies the member firm of the completed transaction.

Answer 223

Order Support System (OSS)

Question 224

At each trading post, there is a(n) ______ who keeps track of public limit orders and oversees the opening and closing of the trading day. The ______ works for the exchange and cannot trade for his own account.

Answer 224

Order Book Official (OBO)

Question 225

On the trading floor, there are also ______ and ______, who both execute trades for customers.

Answer 225

1. Floor Brokers

2. Market-Makers

Question 226

There are ______ Floor Brokers and Floor Brokers who are ______ of member firms who execute orders for their firm’s customers.

Answer 226

1. Independent

2. Employees

Question 227

______ are members of the exchange who trade for their own account. A(n) ______ will make bids and offers for options when there is a shortage of public orders; they literally make markets.

Answer 227

Market Maker(s)

Question 228

The ______ regulates how options are traded.

Answer 228

Chicago Board Options Exchange (CBOE)

Question 229

In order to promote an orderly market open in options trading, each options series goes through a(n) ______. The ______ opens trading by calling for Bids and Offers for each series. This establishes a(n) ______ for each options series. Only after all series have gone through the trading rotation will all options series be available for ______.

The converse holds true at the market close: Each ______ goes through a(n) ______ to get ______ Bids and Offers.

Answer 229

1. Opening Rotation
2. Order Book Official (OBO)
3. Opening Price
4. Open Trading
5. Series
6. Closing Rotation
7. Closing

Question 230

A(n) ______ is defined as all options of one issuer with the same class (all calls of one issuer or all puts of one issuer are another), exercise price, and expiration month.

Answer 230

Options Series

Question 231

A(n) ______ on a particular stock will not open or start trading until the underlying stock is trading at its primary market, i.e. on the exchange, NASDAQ, etc.

Answer 231

Option

Question 232

______ Rule: When trading is ______ on a stock, trading in options on that stock is ______ by the options exchange.

Answer 232

1. Trading Halts
2. Halted
3. Halted

Question 233

______ Rule: ______ cannot be used to cover short calls.

Answer 233

Restricted Stock

Question 234

______ Rule: Member firms have to ______ to the exchange information about members, employee, and customer accounts that have ______ or more option contracts on the same side of the market. This doesn’t constitute a position limit violation; it’s only a(n) ______ requirement.

Answer 234

1. Reporting
2. Report
3. 200
4. Reporting

Question 235

Each option account must be approved by a(n) ______ prior to trading.

Answer 235

Registered Options Principal (ROP)

Question 236

All option account activity must be approved by a(n) ______.

Answer 236

Registered Options Principal (ROP)

Question 237

A(n) ______ is a principal who is qualified and registered to supervise options activity.

Answer 237

Registered Options Principal (ROP)

Question 238

When a customer account is approved for option activity, the customer is given the ______.

Answer 238

Option Disclosure Document

Question 239

The ______ details the risks involved in trading options and must be sent to the customer ______ or ______ to ______ by the ROP. This document is prepared by the ______.

Answer 239

1. Option Disclosure Document
2. At or Prior to Account Approval
3. Options Clearing Corporation (OCC)

Question 240

The ______ is given to the options customer and the customer must sign and return it within ______ of receipt. When customers sign the ______, they must verify net worth, annual income, and that they’ve read and understood the ______. They also confirm that they understand their approved level of trading and will abide by the ______ imposed by the exchange.

Answer 240

1. Option Agreement
2. 15 Days
3. Option Agreement
4. Options Disclosure Document
5. Position Limits

Question 241

If the account is to be a(n) ______ account in which the registered representative or the member firm can decide either the ______ (buy or sell), the ______ (# of contracts), or the ______ (contract), the account must be approved as ______. The firm must have written ______ authority from the customer.

Answer 241

1. Discretionary
2. Action
3. Amount
4. Asset
5. Discretionary
6. Discretionary

Question 242

______ accounts have to be reviewed more frequently by the ROP.

Answer 242

Discretionary

Question 243

Unless the customer is buying options only, a(n) ______ must be signed and ROP-approved prior to the first ______ trade.

Answer 243

Margin

Question 244

When customers buy a(n) ______, they must pay in full and not borrow any money. However, if the ______ position is covered, it can be done in the cash account.

Answer 244

Option

Question 245

Short options are considered ______ if the investor has the cash in the account.

Answer 245

Covered

Question 246

To open an options account, the following must occur in the order stated:

1. ______ completed.
2. ______ agreement and ______ agreement must be fully executed unless the customer is only buying options.
3. ______ must be provided prior to the registered option principal approving the account.
4. The customer return the signed ______ to the brokerage firm within ______ of the new account approval. However, if the customer is late signing the ______ and sending it back, only closing transactions may occur.

Answer 246

1. New Account Form

2a. Customer Loan Agreement
2b. Margin Agreement

3. Options Disclosure Document

4a. Options Account Agreement
4b. 15 Days
4c. Option Agreement

Question 247

Option advertising must be approved by a(n) ______ prior to first use. It must be filed with the ______ at least ______ prior to use. Advertising may not address any specific option or performance.

Answer 247

1. Registered Options Principal (ROP)
2. Self-Regulatory Organization (SRO)
3. 10 Days

Question 248

Option ______, which is must more specific than advertising, must be approved in advance by a registered options principal.

Answer 248

Sales Literature

Question 249

Whenever sending out option sales literature, the registered representative or the broker/dealer is also required to send a copy of the ______. This document discloses the risks involved in trading options.

Answer 249

1. Options Clearing Corporation (OCC) Disclosure Document

Question 250

Options are ______ and subject to ______ tax treatment.

Answer 250

1. Capital Assets

2. Capital Gains

Question 251

If puts or calls are purchased and held for more than a year, the profit or loss on the sale is treated as a(n) ______ ______.

Answer 251

1. Long-Term

2. Capital Gain or Loss

Question 252

If puts or calls are purchased and held for less than a year, the profit or loss on the sale is treated as a(n) ______ ______.

Answer 252

1. Short-Term

2. Capital Gain or Loss

Question 253

Long puts and calls that expire are treated as a(n) ______ for tax purposes. The expiration date is the ______.

Answer 253

1. Sale

2. Sale Date

Question 254

Exercising options is not a(n) ______ event. When a call holder exercises and purchases the underlying security, a new ______ period begins the day after he exercises the call. The ______ for the stock is the strike plus the premium paid for the call.

Answer 254

1. Taxable
2. Tax Holding
3. Cost Basis

Question 255

Exercising options is not a(n) ______. When a put holder exercises and sells the underlying security, the ______ equal the strike price less the premium paid for the put. This is compared to the investor’s ______ to determine capital gain or loss.

Answer 255

1. Taxable Event
2. Sales Proceeds
3. Stock Purchase Price

Question 256

Income from writing puts and calls is treated as a(n) ______ regardless of how long the investor held the position. It is included in income when the option position is ______, either from a closing purchase or expiration.

Answer 256

1. Short-Term Capital Gain

2. Closed

Question 257

If a call writer is exercised, the sale proceeds equal the ______ plus the ______ . The tax treatment of the profit or loss depends on how long the investor held the ______.

Answer 257

1. Strike Price
2. Premium Received
3. Underlying Security

Question 258

If a put writer is exercised, the cost basis is established for the underlying security purchased. This cost basis equals the ______ less the ______. The tax holding period for this new stock position begins ______.

Answer 258

1. Strike Price
2. Premium Received
3. The Day After The Purchase

Question 259

Profits and losses from long LEAPS (held for more than 1 year) are treated as ______. Income from writing LEAPS is treated as a(n) ______ regardless of the holding period.

Answer 259

1. Long-Term Capital Gains and Losses

2. Short-Term Capital Gain

Question 260

______ are contracts on assets other than equities. Breakeven, gain, and loss are calculated the same way. Long calls and short puts are ______. Short calls and long puts are ______. The ______ is in control and the ______ is obligated to perform if instructed.

Answer 260

1. Nonequity Options
2. Bullish
3. Bearish
4. Holder
5. Writer

Question 261

listed put and call options are traded on ______ like the S&P 500 and the S&P 100 (OEX) as well as ______ that track specific market sectors such as the XOI (Oil Index).

Answer 261

1. Broad-Based Indices

2. Narrow-Based Indices

Question 262

______ allow investors to capitalize on price movements of the stock market as a whole or stock market sectors, and can be used to hedge a portfolio of stocks.

Answer 262

Index Options

Question 263

______ trade on the AMEX, CBOE, ISE, NYSE Arca, and the PHLX.

Answer 263

Index Options

Question 264

Usually, index options have a contract multiplier of ______.

Answer 264

100

Question 265

When index options are exercised, they settle in ______, not ______. This is called ______.

Answer 265

1. Cash
2. Securities
3. Cash Settlement

Question 266

The index option holder receives cash equal to the ______ of the option. The index option writer is required to deliver cash equal to the ______ of the option, on the ______ business day.

Answer 266

1. Intrinsic Value
2. Intrinsic Value
3. Following

Question 267

The exercise settlement value is based on the ______ or the ______ (depending on the index) of the underlying index on the _______ the option is exercised.

Answer 267

1. Closing Value
2. Opening Value
3. Day

Question 268

______: Exercise settlement values are based on the value of the underlying index at the market open.

Answer 268

AM Settlement

Question 269

______: Exercise settlement values are based on the value of the underlying index at the market close.

Answer 269

PM Settlement

Question 270

An investor exercises an OEX Oct 530 call. The closing value of the OEX (S&P 100) on the day of exercise is 537.

The investor will receive ______.

The call writer must deliver ______ on the _______.

Answer 270

1. $700
2. $700
3. Next Business Day

$537 (exercise) - $530 (strike) = $7 x 100 contract multiplier = $700

Question 271

In reality, investor’s don’t usually exercise ______. Why bother exercising an option that settles in ______ when you can just sell it for cash in the options market? Plus, when you sell options, the premium will include the remaining ______.

Answer 271

1. Index Options
2. Cash
3. Time Value

Question 272

Most index options are _______, meaning they may only be exercised during a specified time period just prior to expiration (usually on Friday). Options on the S&P 500 are _______.

Answer 272

European Style

Question 273

______ may be exercised any time up to the exercise cut-off time on expiration day. OEX (S&P 100) are ______.

Answer 273

American Style

Question 274

American style index options expire on the ______ of the month. For European style index options, expiration is the business day ______ the day that the exercise settlement is calculated (usually a(n) ______).

Answer 274

1. Third Friday
2. Before
3. Thursday

Question 275

Trading hours for broad-based indices options are ______ to ______ .

Answer 275

9:30 A.M. to 4:15 P.M.

Industry-Specific Indices: 9:30 A.M. to 4:00 P.M.

Question 276

Industry specific indices trade from ______ to ______.

Answer 276

9:30 A.M. to 4:00 P.M.

Broad-Based Indices: 9:30 A.M. to 4:15 P.M.

Question 277

Index options trades settle ______.

Answer 277

On The Next Business Day

Question 278

Four time per year, in ______, ______, ______, and ______, three types of options expire on the same. These options are ______, ______, and ______. This occurrence is known as ______.

Answer 278

1. March, June, September, and December
2. Stock Options
3. Index Options
4. Options on Futures
5. Triple Witching

Question 279

Triple witching days are generally associated with _______.

Answer 279

Volatility

Question 280

Currently, there are no _______ on broad-based index options; however, this is subject to change. There are ______ for exchange members, regarding member firms and their customers who hold large positions in broad-based index options.

Answer 280

1. Position Limits

2. Reporting Requirements

Question 281

You cannot do a(n) ______ on an index because there is no _______.

Answer 281

1. Covered Write

2. Underlying Stock

Question 282

Investors and portfolio managers buy ______ to insure stock portfolios against market downturns and to protect unrealized gains.

Answer 282

Index Puts

Question 283

To insure a portfolio of small- and mid-cap stocks, an investor might buy index puts on the ______. To insure a diversified portfolio of large cap stocks, ______ index puts might be chosen.

Answer 283

1. Russell 2000

2. S&P 500

Question 284

To calculate how many puts to insure a portfolio, divide the ______ of the portfolio by the ______ x ______.

Answer 284

1. Dollar Value
2. Index Value
3. Contract Multiplier

Question 285

______ = Portfolio Value / (Index Value + Contract Multiplier)

Answer 285

Number of Puts to Insure a Portfolio

Question 286

An investor owns a portfolio of large cap stocks worth $735,000 with a substantial unrealized gain. The investor wants to “insure” the portfolio and decides to purchase OEX Jan 475 puts. The current index value is 490. How many puts must be purchased?

Answer 286

15 Puts

$735,000 (portfolio value) / [ 490 (index value) x 100 (contract multiplier) ] = 15

Question 287

______ is a measurement of how closely the volatility of a stock, or a portfolio of stocks, follows the overall market.

Answer 287

Beta

Question 288

A stock or portfolio with a beta of ______ has the same volatility as the overall stock market. If it has a beta of ______, it is 25% less volatile. If it has a beta of ______, it is 25% more volatile than the market.

Answer 288

1. 1
2. 0.75
3. 1.25

Question 289

If the beta of their portfolio is ______ than the market, portfolio managers need to purchase more ______ to hedge their portfolio.

Answer 289

1. Higher

2. Puts

Question 290

To hedge a portfolio with a beta of 1.10, the manager needs to purchase ______ more puts. A portfolio of 1.20 needs ______ more puts, etc.

Answer 290

1. 10%

2. 20%

Question 291

Portfolio Value: $1,000,000
Portfolio Beta: 1.20
Current S&P 100 (OEX) Index Value: 480

How many puts are needed to hedge this portfolio?

Answer 291

25 puts are needed to hedge this portfolio

Puts = $1,000,000 (portfolio) / [ 480 (OEX value) x 100 (contract multiplier) ] = 20.83 puts

Hedge = 20.83 puts x 1.20 (beta) = 24.97 puts

Question 292

______ trade on U.S. Government debt securities, including ______, ______, and ______.

Answer 292

1. Options
2. T-Bills
3. T-Notes
4. T-Bonds

Question 293

There are two kinds of options: ______ and ______, also known as yield-based options.

Answer 293

1. Bond Options

2. Interest Rate Options

Question 294

______ are price-based and give the option holder the right to buy or sell bonds at the strike price.

Answer 294

Bond Options

Question 295

______ are yield-based; they are based on an underlying yield and settle in cash.

Answer 295

Interest-Rate Options

Question 296

Bond- and yield-based options settle ______ style.

Answer 296

European

Question 297

The underlying security in a yield option is a(n) ______.

Answer 297

Bond

** DEBT OPTIONS **

Question 298

When interest rates go up, bond prices go down, and vice versa; therefore, for a BOND OPTION, an investor who thinks that interest rates are going higher will purchase ______ (or write ______) and an investor who thinks that interest rates are going down will purchase ______ (or write ______).

Answer 298

1. purchase Puts
2. write Calls
3. purchase Calls
4. write Puts

** DEBT OPTIONS **

Question 299

Contract size for T-notes and T-bonds is ______; ______ bonds or notes with a(n) ______ face value.

Answer 299

1. $100,000
2. 100
3. $1,000

** DEBT OPTIONS **

Question 300

Contract size for T-bills is ______; ______ T-bills with ______ face value.

Answer 300

1. $1,000,000
2. 100
3. $10,000

** DEBT OPTIONS **

Question 301

Strike prices are a(n) ______ of face value. For example, a T-note call with a strike price of 98 means that the holder has the right to purchase 100 T-notes at 98 or ______.

Answer 301

1. Percentage
2. $98,000

** DEBT OPTIONS **

Question 302

T-bond and T-note premiums are in ______, just like bonds, and points are ______. For example, if a T-note call has a premium of 2.10 the dollar value of the premium is ______.

Answer 302

1. 32nds
2. $1,000
3. $2,312.50

2 + 10/32 = 2.3125 x $1,000 = $2,312.50

** DEBT OPTIONS **

Question 303

T-bill points are worth ______; one point is ______ but T-bills have ______ maturities, so ______ / 4 = ______. Premiums are quoted as a(n) ______ of face value. The dollar value of T-bill option premium of 0.6 is ______.

Answer 303

1. $2,500
2. $10,000
3. 13-Week
4. $10,000
5. $2,500
6. Percentage
7. $1,500

0.6 (premium) x $2,500 (point) = $1,500

** DEBT OPTIONS **

Question 304

Interest rate options are based on an underlying ______.

Answer 304

Yield

** YIELD-BASED OPTIONS **

Question 305

Interest rate options are available on ______, ______, and ______.

Answer 305

T-bills, T-notes, and T-bonds

** YIELD-BASED OPTIONS **

Question 306

When interest rates go up, bond prices go down, and vice versa; therefore, for an INTEREST RATE OPTION, If investors think interest rates are going higher, they will buy ______ (or write ______, and if they think interest rates are going lower they will buy ______ (or write ______).

Answer 306

1. buy Calls
2. write Puts
3. buy Puts
4. write Calls

** YIELD-BASED OPTIONS **

Question 307

Exercise settlement is in ______; the option holder receives ______ equal to the intrinsic value of the option.

Answer 307

Cash

** YIELD-BASED OPTIONS **

Question 308

The underlying value is the interest rate multiplied by ______. For example, the underlying value on an option with a 5.5% yield is ______.

Answer 308

1. 10
2. $55.00

5.5% x 10 = 55

Question 309

Strike prices are based on ______; so a 55 strike price equals ______ yield.

Answer 309

1. Interest Rates

2. 5.5%

Question 310

Interest rate premiums are multiplied by ______. For example, TNX 45.00 call @ $3. The total premium is ______.

Answer 310

1. 100
2. $300

$3 (premium) x 100 = $300

Question 311

At expiration, if interest rates are 5.5%, the holder of TNX 45.00 call would exercise and receive the intrinsic value of ______.

Answer 311

$10

Underlying Value: 5.5% x 10 = $55
Strike Price: $45
$55 (value) - $45 (call) = $10

Question 312

Investors can use ______ to speculate on the direction of interest rates and to hedge a bond portfolio against a rise in interest rates.

Answer 312

Interest Rate Options

Question 313

Investors could also write bond or interest rate options to increase the ______ on their portfolio.

Answer 313

Yield

Question 314

______ are options on foreign currencies.

Answer 314

World Currency Options

Question 315

A currency option is never on the ______; the option is always on the ______ currency.

Answer 315

1. U.S. Dollar

2. Foreign

Question 316

Foreign currency options are quoted in ______.

Answer 316

U.S. Cents

Question 317

Though you are always better on the foreign currency, the ______ and ______ are expressed in U.S. dollars.

Answer 317

1. Strike Price

2. Premium

Question 318

Foreign currency options normally trade on the ______. Trading hours for foreign currency options run from ______ to ______ Eastern.

Answer 318

1. Philadelphia Stock Exchange

2. 9:30 A.M. to 4:00 P.M.

Question 319

The same option fundamentals apply to all options, regardless of the underlying asset. With world currency options, a long call is still ______ and a long put is still ______. The only thing different is the underlined security. Instead of an equity or index, the underlying asset is a(n) ______.

Answer 319

1. Bullish
2. Bearish
3. Foreign Currency

Question 320

The term for current market value of the foreign currency is _______.

Answer 320

Spot Price

Question 321

Foreign currency options normally have a contract size of ______, so one contract represents ______ units of that foreign currency.

One exception is Japanese yen. A yen represents ______ per contract.

Answer 321

1. 10,000
2. 10,000
3. 1 million

Question 322

World currency options exercise ______, meaning they can only be exercised on the expiration date.

Answer 322

European-Style

Question 323

There are also limits of the number of world currency contracts an investor may hold on the same side of the market - ______ side or ______ side. Position limits for an individual (or an individual acting in concert) are ______ contracts on the same side of the market.

Answer 323

1. Bullish
2. Bearish
3. 200,000

Question 324

Remember that ______ and ______ options are both bullish. ______ and ______ are both bearish.

Answer 324

1. Long Calls
2. Short Puts
3. Short Calls
4. Long Puts

Question 325

Foreign currencies go in the ______ direction of the U.S. dollar. So if you follow the U.S. dollar, and the dollar is declining against the foreign currency, you are ______ on the foreign currency. Conversely, if you expect the dollar to strength, you are ______ on the foreign currency.

Answer 325

1. Opposite
2. Bullish
3. Bearish

Question 326

A memory trick to assist in answering foreign currency test questions is to remember EPIC, which means ______.

Answer 326

Exporters buy
Puts
Importers buy
Calls