Options SIE Flashcards
A customer would sell put contracts because the customer:
A. is bullish on the underlying security
B. is bearish on the underlying security
C. wishes to generate ordinary income
D. wishes to defer taxation of gains on the underlying stock
The best answer is A.
Put contracts are sold when a customer is bullish on the market. If the market rises, the puts expire “out the money” and the writer retains the premiums earned. This is the maximum potential gain for the writer of a put. When the puts expire, the premium received is treated as a short term capital gain for income tax purposes. It is not ordinary income - rather it is “portfolio income,” making Choice C incorrect.
ABC Jan 50 call contracts are trading in the market at .15. What is the dollar price that a customer would pay for 2 contracts at this price? A. $1.50 B. $15.00 C. $30.00 D. $300.00
The best answer is C.
A premium of .15 is $.15 per share. Equity contracts cover 100 shares, so the total premium is $.15 x 100 = $15.00 per contract. Since there are two contracts, the total premium would be $30
An option contract has intrinsic value if exercise is profitable to the:
A. holder, ignoring the premium paid
B. writer, ignoring the premium received
C. holder, including the premium paid
D. writer, including the premium received
The best answer is A.
Intrinsic value is the profit to the holder that would result from an exercise (ignoring premiums paid). Intrinsic value is the same thing as the “in the money” amount
The following contract is “in the money” by how much?
1 ABC Jan 45 Call @ $5
ABC Market Price = $49
A. $0
B. $1 C. $4 D. $5
The best answer is C.
Intrinsic value is the amount by which an option contract is “in the money” - it has nothing to do with the premium. It is the difference between the strike price and market price, if exercise is profitable to the holder. In this case, the holder of the call can buy the stock at the strike price of $45 when the market price is $49, for a $4 profit to the holder. This is the “intrinsic value” of the contract.
What is the “out the money” amount of the following contract?
1 ABC Jan 55 Put @ $2
ABC Market Price = $61
A. $2
B. $4 C. $6 D. $8
The best answer is C.
The “out the money” amount is the loss that would be experienced upon exercise of an option contract. It is the difference between the strike price and market price, if exercise is unprofitable to the holder. Such a contract would be left to expire unexercised. In this case, the holder of the put can sell the stock at the strike price of $55 when the market price is $61, for a $6 loss to the holder. This contract is “out the money” by $6 and would expire unexercised
A customer is short an ABC Jan 60 Call. The position has a profit that the customer wishes to capture. The proper order to enter is a(n): A. opening purchase B. closing purchase C. opening sale D. closing sale
The best answer is B.
All options orders must be marked either “opening” or “closing.” The OCC maintains the record of all listed options contracts. Opening positions are recorded on the books of the OCC; while orders to close positions remove them from the books of the OCC.
Note that a customer can open by selling an option contract and will close buy purchasing that option contract; or the customer can open by purchasing an option contract and will close by selling that option contract.
The holder of a call on a listed stock exercises. The holder must: I deliver stock II deliver cash III take delivery of stock IV take delivery of cash
A. I and III
B. I and IV
C. II and III D. II and IV
The best answer is C.
If the holder of a call option on listed stocks exercises, he or she must buy 100 shares of stock, for which the holder will pay the strike price in cash.
The writer of a call on a listed stock is exercised. The writer must: I deliver stock II deliver cash III take delivery of stock IV take delivery of cash
A. I and III
B. I and IV C. II and III D. II and IV
The best answer is B.
If the writer of a call option on listed stocks is exercised, he or she must deliver 100 shares of stock, for which the writer will receive the strike price in cash.
If an equity put holder exercises a contract, the holder must deliver: A. cash in 1 business day B. stock in 1 business day C. cash in 2 business days D. stock in 2 business days
The best answer is D.
If the holder of an equity put exercises, he is selling the stock at the strike price. Settlement is 2 business days after exercise date - this is a regular way stock trade.
If the writer of an equity put contract is exercised, the writer must deliver: A. cash in 1 business day B. stock in 1 business day C. cash in 2 business days D. stock in 2 business days
The best answer is C.
If the writer of an equity put contract is exercised, he is obligated to buy the stock at the strike price (paying cash) from the holder of the put. Settlement is 2 business days after exercise date - this is a regular way stock trade.
The “cost” of an option contract is the:
A. premium
B. exercise price
C. market price of the underlying security
D. intrinsic value
The best answer is A.
The cost of an option contract is the premium, paid from option buyer to option seller. The exercise price is the price of a trade in the underlying security, if the contract is exercised. Intrinsic value is the profit to the holder that would result from an exercise (ignoring premiums paid).
ABC Jan 50 call contracts are trading in the market at 3.40. What is the dollar price that a customer would pay for 2 contracts at this price? A. $34.00 B. $340.00 C. $680.00 D. $1,360.00
The best answer is C.
A premium of 3.40 is $3.40 per share. Equity contracts cover 100 shares, so the total premium is $3.40 x 100 = $340.00 per contract. Since there are two contracts, the total premium would be $680.
If the market price is below the strike price on a put contract, the difference is termed the: A. in the money amount B. at the money amount C. out the money amount D. time value amount
The best answer is A.
An option contract is “in the money” if exercise would be profitable to the holder, ignoring any premiums paid. This occurs if the market price is below the strike price on a put contract. For example, 1 ABC Jan 50 Put, when the market price is $45, is in the money by 5 points. The holder would be able to exercise this contract and sell the stock at $50 per share when the market price is $45 per share.
What is the “intrinsic value” of the following contract?
1 ABC Jan 55 Put @ $9
ABC Market Price = $49
A. $2
B. $4
C. $6 D. $8
The best answer is C.
Intrinsic value is the amount by which an option contract is “in the money” - it has nothing to do with the premium. It is the difference between the strike price and market price, if exercise is profitable to the holder. In this case, the holder of the put can sell the stock at the strike price of $55 when the market price is $49, for a $6 profit to the holder. This is the “intrinsic value” of the contract.
“Out the money” is defined as the:
A. excess of premium over the underlying security’s market price
B. excess of time premium over the “in the money” amount
C. difference between the strike price and market price of the underlying security, if exercise is unprofitable to the holder
D. maximum potential gain on a contract
The best answer is C.
An “out the money” contract is one that the holder would let expire unexercised. It is the difference between the strike price and market price, if exercise is unprofitable to the holder.
