Unit 3 Quiz Deck Flashcards
If par value of the bond is $1,000, what is the value of 1 bond point?
A) $1
B) Cannot be calculated without knowing the current price of the bond
C) $100
D) $10
D) $10
A bond point is 1% of the bond’s par value of $1,000 ($10).
A client has established a long put position. The contract will have intrinsic value when the price of the underlying stock is
A) less than the exercise price.
B) equal to the exercise price.
C) greater than the exercise price.
D) anywhere near the exercise price, above or below.
A) less than the exercise price.
Put buyers are bearish and want the underlying stock to fall in value. Puts give the owner the right to sell at the contract’s exercise (strike) price. Therefore, the put contract will pick up intrinsic value if the price of the underlying stock falls below the contract’s strike price. The long put position will become profitable if the stock falls below the strike by more than the amount of the premium paid.
An investor who buys and sells options on stock is
A) a lender to the company.
B) a stockholder.
C) an owner of the company.
D) neither an owner of nor a debtor of the company.
D) neither an owner of nor a debtor of the company.
Derivative securities of corporate equity securities represent neither equity (ownership) in a company nor debt (a loan). They represent the right to either buy or sell the stock at a later time at a fixed price.
Your customer is long 1 October 55 put at 4. The customer’s maximum loss potential is
A) 59 points ($5,900).
B) 4 points ($400).
C) 40 points ($4,000).
D) 51 points ($5,100).
B) 4 points ($400).
For long option contracts (puts or calls), the maximum loss is always the premium initially paid—in this case, 4 points ($400). This happens if the price of the underlying is at or above the put strike price at the option’s expiration—in other words, at, or out of the money.
The breakeven point on a long put is
A) strike price + premium.
B) the premium.
C) strike price – premium.
D) the strike price
C) strike price – premium.
Puts go up in value as the stock price moves below the strike price. To break even, the stock must drop enough to cover the cost of the option premium. The formula is strike price – premium.
A March 25 put purchased at 1.5 has expired without being exercised. The owner of the put
A) losses the $25 paid.
B) keeps the $150 paid.
C) keeps the $25 paid.
D) loses the $150 premium paid.
D) loses the $150 premium paid.
The owner (buyer) of the put would have paid 1.5 ($150) for the contract. When option contracts expire unexercised, the buyer (owner, holder, party who is long) loses the premium paid—in this case, $150.
At expiration, for those who trade call options, which of the following is true?
A) Call writers want the contract to be in the money.
B) Call buyers want the contract to be in the money.
C) Call writers want the contract to be trading with intrinsic value.
D) Call buyers want the contract to be out of the money.
B) Call buyers want the contract to be in the money.
At expiration for all options (calls and puts), buyers want the contracts to have intrinsic value—therefore, be in the money. Writers, on the other hand, want the contracts to be either at or out of the money and therefore have no intrinsic value.
Which of the following statements about listed options is true?
A) Breakeven of a call option may be found by adding its strike price to the market value of the underlying stock.
B) Listed options settle on the next business day after the trade date (T+1).
C) The options disclosure document (ODD) must be delivered to only those who purchase out-of-the-money calls or puts.
D) All in-the-money options are profitable
B) Listed options settle on the next business day after the trade date (T+1).
Listed options settle on the next business day after the trade date (T+1). Whether long or short a call option contract is deemed in-the-money when the market price of the stock is above the strike price by any amount. However, an option that is in-the-money may not necessarily be profitable. For example, if a call option were purchased at 3 but in-the-money by 2, there would be a loss of 1 if the option were closed (sold) at or near expiry.
Regarding options, it should be recognized that the maximum movement for any underlying stocks price could be
A) as low as zero or as high as infinity.
B) as low as its breakeven or as high as its maximum gain point.
C) its breakeven.
D) as low as zero or as high as its breakeven point.
A) as low as zero or as high as infinity.
Any stock’s price could move as low as zero or as high as infinity. That movement toward either of those points, and the market attitude of the option position employed (bullish or bearish), determines what the maximum gain, loss, or breakeven point is.
For options, each is a two-party contract, which allows
A) either the buyer or 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) the buyer to exercise the contract, with the seller obligated to fulfill the terms of the contract.
D) neither the buyer nor the seller to exercise the contract.
C) 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.
An equity option call buyer has the right to
A) sell the stock and therefore is bullish.
B) purchase stock and therefore is bearish.
C) purchase stock and therefore is bullish.
D) sell the stock and therefore is bearish.
C) purchase stock and therefore is bullish.
Call buyers pay the premium for the right to purchase the stock at the strike price. Those who buy stock are bullish (anticipate that it will rise).
An investor sells one equity call option on DGF stock. This investor is
A) neither bullish nor bearish on the DGF stock.
B) bearish on DGF the stock.
C) bullish on the DGF stock.
D) both bullish and bearish on the DGF stock.
B) bearish on DGF the stock.
Those who sell equity call options may be obligated to sell the stock at the strike price if the contract is exercised by the owner. Being in a position to sell makes the investor bearish.
A put will have intrinsic value if, just before expiration, the price of the underlying stock is
A) less than the exercise price.
B) greater than the exercise price.
C) equal to the exercise price.
D) anywhere near the exercise price, above or below.
A) less than the exercise price.
Put buyers are bearish. Puts have intrinsic value if the price of the underlying stock falls below the exercise price of the option, The client will be profitable if the price decline (below the strike) exceeds the amount of the premium paid. If the price of the stock rises above the exercise price or is the same as the exercise price, the put will expire worthless.
A put option reaches its expiration date and goes unexercised. This means
I. the buyer gains the premium paid.
II. The buyer loses the premium paid.
III. the writer gains the premium received.
IV. the writer loses the premium received.
A) II and IV
B) I and III
C) II and III
D) I and IV
C) II and III
Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If any contract, put or call, goes unexercised at expiration, the buyer loses the premium paid while the seller gets to keep it; a gain.
Listed options can be exercised by
A) the holder after the expiration date.
B) the holder from the time of purchase until they expire.
C) the writer after the expiration date.
D) the writer from the time of purchase until they expire.
B) the holder from the time of purchase until they expire.
Listed options can be exercised by the holder (owner, buyer, party who is long) from the time of purchase until they expire. Writers (sellers, party who is short) cannot exercise contracts. Instead, writers are assigned when the owners of the contracts exercise them.
