Options Test Questions

Question 0

Which strategy gives best downside protection for long position?

Answer 0

BUY A PUT, buying a put gives best protection because you are protected all the way down to zero

Question 1

A customer sells 100 shares of ABC @ $40 and writes 1 ABC May 40 put @ 3. The maximum loss potential to the customer is:

Answer 1

A short put does not cover or protect a short sale. The market value of ABC could increase causing UNLIMITED LOSS.

Question 2

All of the following positions have unlimited loss potential except:

A: short stock-short put
B: Short straddle
C: uncovered call
D: uncovered put

Answer 2

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

Question 3

An investor has large portfolio of blue chip stocks, expects to that mkt will remain stable or decline slightly: what is best choice

Answer 3

Write covered calls

Question 4

Customer purchases 1 XYZ July 50 call @ 5, what is break even:

A. 5
b. 45
C. 50
D. 55

Answer 4

50(call exercise price) + 5(premium paid) = 55 break even

Question 5

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

Answer 5

All are expected

CALLS: calls are covered when the long is lower strike

Question 6

Customer who is short 5 ABC JUNE 45 calls and short 5 ABC June puts has put on which of the following types?

Answer 6

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

Question 7

An option holder to OCC rules can exercise option until:

Answer 7

5:30 pm eastern on business day precedes Saturday of expiration

Question 8

All of following options position are bearish except:

1. The purchase of a put
2. The sale of an uncovered put
3. The sale of an uncovered call
4. Net credit call spread

Answer 8

The sale of a put, covered or uncovered

Question 9

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?

Answer 9

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

Question 10

Note COVERED CALL WRITING IS GENERALLY DONE IN DOWN MARKET OR NEUTRAL

Answer 10

Not bullish

Question 11

An investor sells stock by exercising a long put, the sales proceeds for tax purposes is equal to what:

Answer 11

The exercise price of the out minus the premium paid for the put

Question 12

All of the following are reason to write call options:

Answer 12

Increase rate of return on invested capital, hedging, expecting the price of the stock to remain neutral

Question 13

Which of the following option positions would benefit most if the market price of a stock remained neutral

Answer 13

Short straddle and uncovered writing. This would be most beneficial because both positions expire and writer keeps premium

Question 14

Which strategy would best be suited for an investor with a portfolio of blue chip stocks who is seeking income

Answer 14

Covered call writing: conservative, anticipate no change or minimal declines, minimal risk

Question 15

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?

Answer 15

Closing purchase. Written or sold call options, goes back in mkt to buy call options back

Question 16

Customer buys 100 shares of XYZ @ 60 and buys 1 XYZ October 60 put at 4. What’s is max loss and/or profit?

Answer 16

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

Question 17

If price goes below break even, you’d have a…

Answer 17

Loss because the mkt px of the stock was below breakeven

Question 18

An investor with a short straddle position has:

Answer 18

Unlimited loss potential, because the short straddle includes a short call position the customer would be subject to unlimited loss

Question 19

If an investor acquires a Long stock position by exercising a long call, the cost basis of the acquired stock is what?

Answer 19

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

Question 20

At expiration if mkt px of stock is same as the strike price of option which position would reality in profit

Answer 20

Short calls, short call/short put

Seller of short positions would keep premiums received for writing options

Question 21

If an investor writes(sells) a put and the option expires unexercised, the max potential gain on this is?

Answer 21

It is limited to the premium

Question 22

When an investor buys a call option on common stock, max potential gain would be

Answer 22

Unlimited

Question 23

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

Answer 23

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

Question 24

Investor buys 100 shares of ABC stock @ 25. If the investor later buys a put on ABC he/she has

Answer 24

Hedge against a price decline. Long puts on long stocks

Question 25

The best strategy to hedge a short stock position against the possibility of an increase in the market price of the security would be

Answer 25

Buy a call, long calls/short stock