UNIT 3 QBANK Flashcards
Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it?
A) Short put
B) Long put
C) Long call
D) Short call
D) Short call
Short calls are bearish. Wanting the stock to go down the risk that the stock price will rise and, in theory, can go to infinity. Therefore, short calls carry unlimited risk. Of the four basic options positions, it is the only one with an unlimited loss potential.
Someone who is short 1 August 35 put at 3 will breakeven at
A) 35.
B) 38.
C) 32.
D) 30.
C) 32.
For puts, the breakeven is found by subtracting the premium (3) from the strike price (35). Put sellers are bullish; therefore, the short put contract is profitable at or above the breakeven at expiration.
Two investors have engaged in the same put transaction: one, the buyer who is now long the put and the other, the seller who is now short the put. All of the following are true except
A) maximum gain and loss potential for one investor are different than the others maximum gain and loss potential.
B) both investors have a maximum loss potential that is limited to the premium paid.
C) breakeven is the same number for both investors.
D) one investor’s maximum loss potential is the other’s maximum gain potential.
B) both investors have a maximum loss potential that is limited to the premium paid.
All options are a two-party contract. One investor’s maximum loss potential is the other’s maximum gain potential. Therefore, for each of the parties, the maximum gain is different and the maximum loss is different. Only buyers have a maximum loss potential limited to the premium paid. And, finally, remember that the breakeven is always the same for both parties. The put buyer, who is bearish, wants the underlying stock price below the breakeven, while the put writer, who is bullish, wants the underlying stock price above the breakeven.
Which of the following documents must be provided to the customer prior to approval of an options account?
A) Prospectus
B) Statement of additional information
C) Official statement
D) Options Disclosure Document
D) Options Disclosure Document
The option disclosure document (typically referred to as the ODD) must be provided prior to account approval.
If the options agreement is not returned signed within 15 days of account approval, which of the following transactions could a customer perform if the initial transaction was buy calls to open?
A) Buy calls to open
B) Sell calls to open
C) Sell puts to open
D) Sell calls to close
D) Sell calls to close
If the agreement is not returned signed in 15 days, only closing transactions to offset those positions already open would be allowed.
All of the following actions must be completed before a customer enters the first option order except
A) completion of (signing of) the options agreement.
B) approval by a branch office manager (BOM) or registered options principal (ROP).
C) delivery of an Options Clearing Corporation (OCC) disclosure booklet.
D) completion of the new account form.
A) completion of (signing of) the options agreement.
Customers do not have to complete (sign) the options agreement before entering an order, although under the rules, the agreement must be signed and returned by the customer within 15 calendar days of account approval.
For options, each is a two-party contract, which allows
A) neither the buyer nor the seller to exercise the contract.
B) the seller to exercise the contract, with the buyer obligated to fulfill the terms of the contract.
C) either the buyer or the seller to exercise the contract.
D) the buyer to exercise the contract, with the seller obligated to fulfill the terms of the contract.
D) the buyer to exercise the contract, with the seller obligated to fulfill the terms of the contract.
Options contracts involve two parties: buyer and seller. The buyer has the right to exercise the contract, and when this occurs, the seller is obligated to fulfill the terms of the contract.
Which of the following option strategies has the most risk?
A) Short puts
B) Long puts
C) Short calls
D) Long calls
C) Short calls
Short calls have unlimited loss potential.
An August 15 call is written at 4. The call expires without being exercised by the owner. The writer of the call
A) loses the $150 paid when the call was written.
B) loses the $400 paid when the call was written.
C) keeps the $400 received when the call was written.
D) keeps the $150 received when the call was written.
C) keeps the $400 received when the call was written.
The writer (seller) of the call would have received 4 ($400) for the contract when it was written. If the contract expires unexercised, the writer keeps the $400 premium received.
If long one equity call option, the owner
A) incurs an obligation to sell 100 shares of the underlying stock.
B) incurs an obligation to purchase 100 shares of the underlying stock.
C) has the right to sell 100 shares of the underlying stock.
D) has the right to purchase 100 shares of the underlying stock.
D) has the right to purchase 100 shares of the underlying stock.
Equity options buyers have the right to purchase shares of the underlying security. One equity option contract represents 100 shares of the underlying security; therefore, the call owner has the right to purchase 100 shares of the stock.
An investor owns 1 November 15 put at 5. The 15 in this contract represents
A) the strike price, the price the investor has paid for the contract.
B) the premium, the price the investor has paid for the contract.
C) the strike price, the price the investor can sell stock at.
D) the premium, the price the investor can purchase stock at.
C) the strike price, the price the investor can sell stock at.
For this put contract, 15 is the strike price, which represents the price at which the investor has the right to sell stock, and 5 represents the $500 premium paid for the contract.
An investor sells (writes) put options on MAS stock. This investor is
A) bearish on the MAS stock.
B) neither bullish nor bearish on the MAS stock.
C) both bullish and bearish on the MAS stock.
D) bullish on MAS the stock.
D) bullish on MAS the stock.
Those who sell put options may be obligated to buy the stock at the strike price if the contract is exercised by the owner. Being in a position to own the stock makes the investor bullish on the stock.
Which of the following pairs of options contracts is not in the money if the strike price is 40 and the market price is 30?
A) Short call and long put
B) Long call and short call
C) Long call and long put
D) Short call and short put
B) Long call and short call
All calls are in the money when the market price is above the strike price. Therefore, calls with a strike price of 40 when the market price is 30 are out of the money. The put options, long or short, in the other three pairs are all 10 points in the money (40 – 30).
Which of the following option positions would offer a full hedge to a long stock position?
A) Long call
B) Short put
C) Short call
D) Long put
D) Long put
The best way to hedge a long stock position is with a long put.
The maximum loss on a long call is
A) unlimited.
B) the premium.
C) strike price – premium.
D) strike price + premium.
B) the premium.
The maximum loss on any long option position is the premium paid. If the price of the underlying security moves against the option, the owner simply does not exercise the option, allowing it to expire worthless.
