Equity Options--Fundamentals and Basic Strategies

Question 1

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 1

A $400 loss of the premium.

Question 2

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

Answer 2

$1.00 or 1 point

Question 3

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

Answer 3

True

Question 4

A put option gives the owner the right to ______.

Answer 4

A put option gives the owner the right to sell.

Question 5

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 5

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

Question 6

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

Answer 6

Right to buy at 70

Question 7

Equity options have a contract size of _____ shares.

Answer 7

Equity options have a contract size of 100 shares.

Question 8

A call option gives the owner the right to _____.

Answer 8

A call option gives the owner the right to buy.

Question 9

What is the maximum profit? Long 1 XYZ July 40 Put at 5.10

Answer 9

The maximum profit is the strike price - premium = 3490.00

Question 10

What is an uncovered call position?

Answer 10

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

Question 11

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

Answer 11

To offset a purchase, an investor would execute a closing sale.

Question 12

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

Answer 12

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

Question 13

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 13

A $600 profit since the investor is bullish and the stock rose 6 points above the breakeven point of 74.

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

False. Only buyers can exercise the contract.

Question 18

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

Answer 18

Opening purchase

Question 19

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

Answer 19

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

Question 20

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

Answer 20

Bullish (to find the strategy for call buyers, use the phrase CALL UP)

Question 21

What is the maximum loss? Short 1 XYZ Oct 95 Call at 3.20

Answer 21

The maximum loss is unlimited

Question 22

The maximum loss for an option buyer is the ____________.

Answer 22

The maximum loss for an option buyer is the premium.

Question 23

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

Answer 23

True

Question 24

What is the breakeven point? Sell 1 RFQ Feb 25 Call at 1.70

Answer 24

The breakeven point is strike price + premium = 26.70

Question 25

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

Answer 25

True. If the option expires worthless, the seller would keep the premium.

Question 26

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

Answer 26

To offset a sale, an investor would execute a closing purchase.

Question 27

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

Answer 27

Opening sale

Question 28

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

Answer 28

True

Question 29

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

Answer 29

False, it is at-the-money.

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

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 31

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

Question 32

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 32

A gain of the $450 premium

Question 33

Sandra buys 1 ABC December 70 Call at 4. What is Sandra's breakeven point?

Answer 33

70 + 4 = 74 (strike price + premium or CALL UP)

Question 34

What is the maximum risk? Buy 1 MNO Sep 120 Call at 3.80

Answer 34

The maximum risk is the premium = 380.00

Question 35

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

Answer 35

True

Question 36

Jim is short 1 MNO August 40 Put at 4.50. What is Jim's breakeven point?

Answer 36

40 - 4.50 = 35.50 (strike price minus the premium or PUT DOWN)

Question 37

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

Answer 37

$2.00 or 2 points

Question 38

What is the maximum gain? Sell 1 RFQ Aug 70 Put at 6.50

Answer 38

The maximum gain is the premium = 650.00

Question 39

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 39

A profit of $1,000. The investor needed the stock down at 75 to breakeven, and the stock fell 10 points beyond 75.

Question 40

Define a class of options.

Answer 40

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

Question 41

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 41

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

Question 42

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

Answer 42

True. For options at- or out-of-the-money, the seller would retain the premium (maximum gain).

Question 43

Calls and puts are the two ________ of options.

Answer 43

Calls and puts are the two types of options.

Question 44

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

Answer 44

0, it is out-of-the-money

Question 45

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

Answer 45

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

Question 46

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

Answer 46

$2.00 or 2 points

Question 47

What is the maximum gain? Write 1 MNO June 35 Call at 2.70

Answer 47

The maximum gain is the premium = 270.00

Question 48

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

Answer 48

True

Question 49

What is the maximum risk? Long 1 RFQ Nov 20 Put at 4.00

Answer 49

The maximum risk is the premium = 400.00

Question 50

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

Answer 50

True

Question 51

With options, what terms are synonymous with buyer?

Answer 51

Owner, holder, long

Question 52

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

Answer 52

$4.00 or 4 points

Question 53

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

Answer 53

$3.00 or 3 points

Question 54

With options, what terms are synonymous with seller?

Answer 54

Writer, short

Question 55

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

Answer 55

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

Question 56

The maximum gain for an option seller is the ____________.

Answer 56

The maximum gain for an option seller is the premium.

Question 57

What is the maximum loss? Sell 1 MNO Dec 40 Put at 3.50

Answer 57

The maximum loss is the strike price - premium = 3650.00

Question 58

What is intrinsic value?

Answer 58

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

Question 59

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

Answer 59

Bearish

Question 60

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

Answer 60

A $600 gain on the premium

Question 61

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

Answer 61

False, it is in-the-money.

Question 62

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

Answer 62

$1.00 or 1 point

Question 63

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 63

A loss of $500, since the option expires at-the-money

Question 64

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

Answer 64

Bearish (to find strategy for put buyers, use the phrase PUT DOWN)

Question 65

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 65

$900 loss. The writer could afford the stock rising to 61(breakeven), but the stock rose 9 points higher than 61.

Question 66

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

Answer 66

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

Question 67

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

Answer 67

Obligation to buy at 40

Question 68

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

Answer 68

Right to sell at 80

Question 69

What is time value?

Answer 69

The option's premium minus the intrinsic value.

Question 70

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

Answer 70

0, it is at-the-money

Question 71

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

Answer 71

Bullish

Question 72

What is the maximum profit? Buy 1 RFQ May 105 Call at 2.40

Answer 72

The maximum profit is unlimited

Question 73

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

Answer 73

Obligation to sell at 55

Question 74

Define a series of options.

Answer 74

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