Options Test Questions Flashcards
Which strategy gives best downside protection for long position?
BUY A PUT, buying a put gives best protection because you are protected all the way down to zero
A customer sells 100 shares of ABC @ $40 and writes 1 ABC May 40 put @ 3. The maximum loss potential to the customer is:
A short put does not cover or protect a short sale. The market value of ABC could increase causing UNLIMITED LOSS.
All of the following positions have unlimited loss potential except:
A: short stock-short put
B: Short straddle
C: uncovered call
D: uncovered put
D: when a customer writes a put - covered or uncovered the loss is limited to the strike price of option less the premium received for writing the option
An investor has large portfolio of blue chip stocks, expects to that mkt will remain stable or decline slightly: what is best choice
Write covered calls
Customer purchases 1 XYZ July 50 call @ 5, what is break even:
A. 5
b. 45
C. 50
D. 55
50(call exercise price) + 5(premium paid) = 55 break even
Write call, cover the short call for margin purposes?
Long call with lower strike price
Bond convertible into stock
100 shares of stock
An escrow receipt
All are expected
CALLS: calls are covered when the long is lower strike
Customer who is short 5 ABC JUNE 45 calls and short 5 ABC June puts has put on which of the following types?
Neutral, when an investor is short both ABC calls and puts it is either a shot straddle or short combination and represents neutral market strategies
An option holder to OCC rules can exercise option until:
5:30 pm eastern on business day precedes Saturday of expiration
All of following options position are bearish except:
- The purchase of a put
- The sale of an uncovered put
- The sale of an uncovered call
- Net credit call spread
The sale of a put, covered or uncovered
Customer purchases 1 ABC April 60 put for 8 and sells 1 ABC April 50 put for 1, what is max profit the customer could realize?
Spread position, max profit potential is (difference bt the strike prices minus the net premium paid)
Difference of strikes(60-50)x shares per contract(100) = $1000-net premium paid(700)= 300
Note COVERED CALL WRITING IS GENERALLY DONE IN DOWN MARKET OR NEUTRAL
Not bullish
An investor sells stock by exercising a long put, the sales proceeds for tax purposes is equal to what:
The exercise price of the out minus the premium paid for the put
All of the following are reason to write call options:
Increase rate of return on invested capital, hedging, expecting the price of the stock to remain neutral
Which of the following option positions would benefit most if the market price of a stock remained neutral
Short straddle and uncovered writing. This would be most beneficial because both positions expire and writer keeps premium
Which strategy would best be suited for an investor with a portfolio of blue chip stocks who is seeking income
Covered call writing: conservative, anticipate no change or minimal declines, minimal risk
Investor written call options on the stock to increase income, investor covers the option to close, sold by buying call options: what is this called?
Closing purchase. Written or sold call options, goes back in mkt to buy call options back
Customer buys 100 shares of XYZ @ 60 and buys 1 XYZ October 60 put at 4. What’s is max loss and/or profit?
The profit would be unlimited because you would be long stock and loss is limited to the premium paid to buy put of 400. Buying the put you lock in a price of 60 at which you could sell the stock
If price goes below break even, you’d have a…
Loss because the mkt px of the stock was below breakeven
An investor with a short straddle position has:
Unlimited loss potential, because the short straddle includes a short call position the customer would be subject to unlimited loss
If an investor acquires a Long stock position by exercising a long call, the cost basis of the acquired stock is what?
The exercise price of the call plus the premium
Premium is added to strike price when determining cost basis of long call which has been exercised
At expiration if mkt px of stock is same as the strike price of option which position would reality in profit
Short calls, short call/short put
Seller of short positions would keep premiums received for writing options
If an investor writes(sells) a put and the option expires unexercised, the max potential gain on this is?
It is limited to the premium
When an investor buys a call option on common stock, max potential gain would be
Unlimited
A customer buys 1 ABC Sept 50 put for $2.50 when the price of ABC stock is 60, what is the maximum profit that the customer may realize
Sell XYZ @$50, if stock goes down to zero he will have a profit of 5000,(50*100), but he had to pay $250 for the put. So 5000-250=4750
