Stock Index Options

Question 0

Give investors the ability to:

Answer 0

Anticipate market moves or hedge a well-diversified portfolio from market( systematic) risk

Question 1

Index options are:

Answer 1

Puts and calls on stock indices, measure market performance of a spec index and in SETTLE IN CASH!

Question 2

A Broad Based Index Option

Answer 2

Cover wide range of industries such as SPX

Question 3

A Narrow Based Index Option

Answer 3

Would have a narrow range of industries such as the Biotech Index

Question 4

The CBOE Volatility Index Options(VIX)

Answer 4

Is a barometer of near-term investor sentiment. An investor expects a significant increase in volatility over the short term with a decline in market should consider buying VIX call options

Question 5

VIX

Answer 5

Measure market expectation 30 day SP 500 index options, wishes to close it would be Tuesday before expiration if contract.

Question 6

More on VIX:

Answer 6

Buy VIX call options provides a hedge
Against the risk of sharply Falling stock
VIX: European~style
Expirations based on a FEB cycle.
1 point in VIX = $100
Automatic exercise occurs if the exercise settlement value is equal to or exceeds the strike price on the call

Question 7

Contract size of index option:

Answer 7

Value of index option take the multiplier of $100 x the value of the underlying index option strike price

Index value $500x$100= $50,500

Question 8

Premiums of index option:

Answer 8

Determine the cost of an index option, u must take the premium quote times the index multiplier of $100

Question 9

American style options index:

Answer 9

Index options settled thru cash payment. Settlement: difference bt the exercise price of the option and current at the close of trading on the day of exercise x $100. Settlement gross settlement. Firms settle next biz day

Question 10

European style index options:

Answer 10

Settled thru payment of cash on biz day following the date of expiration. Difference bt the exercise price of the option and the exercise settlement value. Exercise value: Value of index on the day before expiration. Usually Friday

Question 11

Exercise price of index options:

Answer 11

Set at 5 point intervals

Question 12

Expiration Day:

Answer 12

Trade and expire on monthly basis. Expiration date is Saturday following 3rd Friday of expiration month

Question 13

Opening procedures:

Answer 13

Each exchange which trades index options has the discretion to open the trading of index options

Question 14

An investor who owns a diversified portfolio and expects:

Answer 14

Decline in market, buy stock index puts

Rise in market, buy stock index calls

Question 15

Types of risk on index options include:

Answer 15

Market or systematic, measure to which an average security responds to changes in the market in general.

Also affected by changes In price index securities, interest rates, inflation.

Question 16

CBOE developed RAES

Answer 16

Retail automatic execution system: executes limit orders up to 50 contracts for public customers

Question 17

Flex options:

Answer 17

Are customized equity and equity index options offered on CBOE. Allow customer to customize exercise price, exercise styles and expiration dates.

Question 18

An investor expects a rise In the market and buys 1 OEX June 170 call @ 6 on May on May 6. SP index closes at 187.80 and investor exercises the option. What is gross settlement.

Answer 18

Answer is $1,780, gross settlement means you only consider the exercise and not premium.

Question 19

Stock index options are not used for what?

Answer 19

To be sure that the stock portfolio will not decline in value … Look out for “be sure”

Question 20

A person who wants to hedge a decline in the value of a portfolio made up of long term bonds would most likely use which of the following interest rate or yield.

Answer 20

Buy 30 year interest rate or yield based calls

Since value of portfolio is expected to decline, interest rates would be rising if interest rates are expected to rise, the investor would buy interest rates or yield based call options

Question 21

Stock portfolio manager has decided to hedge his portfolio, and wants the best downside protection?

Answer 21

Buy index Puts, long puts best downside protection.

Question 22

How would the exercise price on a foreign currency option be displayed.

Answer 22

The USD pricing per foreign currency unit.

Question 23

A writer of a June 220 index put if assigned with the index at 215. The writer will be required to?

Answer 23

Deliver the cash: upon assignment the writer of the put will have to deliver cash equal to the difference bt current market value and the strike price of the index