Q&A Hero

Q: Assume you purchase 200 shares of stock at $80 per share and wish to hedge part of your position by writing a 100 share option. The option has a strike price of $75 and a premium of $6. If at the time of expiration, the stock is selling at the following prices ($75, $80, $90) what will be your overall gain or loss?At $75, loss is $400.At $80 loss is $600.At $90 gain is $1,100.

Q: Tom Smith purchases 100 shares of DOUBLE Systems stock for $63 per share and wishes to hedge his position by writing a 100 share call option on his holdings. The option has a $65 strike price and a premium of $8.75. If the stock is selling at $64 at the time of expiration, what will be the overall dollar gain or loss on this covered option play? (Consider the change in stock value as well as the gain or loss on the option.)A. $975.00B. $875.00C. $775.00D. $100.00E. $87.50

Q: A stock is selling for $45.75 with a put option available at a $50 strike that has a premium of $7.50. What is the speculative premium of the put? A. $4.25 B. $1.25 C. $3.25 D. $5.25 E. $7.50

Q: A stock is selling for $45.75, with a put option available at a $50 strike that has a premium of $7.50. What is the intrinsic value of the put? A. $4.25 B. $1.25 C. $3.25 D. $5.25 E. $7.50

Q: A stock is selling for $45.75 with a call option available at a $40 strike that has a premium of $7.50. What percentage of the common stock price does the speculative premium represent? A. 16.39% B. 14.375% C. 12.57% D. 4.38% E. 3.83%

Q: A stock is selling for $45.75, with a call option available at a $40 strike that has a premium of $7.50. What is the speculative premium of the call? A. $.75 B. $1.75 C. $5.00 D. $5.75 E. $7.50

Q: A stock is selling for $45.75, with a call option available at a $40 strike that has a premium of $7.50. What is the intrinsic value of the call? A. $.75 B. $1.75 C. $5.00 D. $5.75 E. $7.50

Q: IBM was trading at $100 when Mrs. Peterson bought a 100 call on IBM at a price of $10. Three months later, IBM common stock was trading at $130, and the call option was trading at $33. The leverage factor for this situation would be: A. 11x. B. 3.3x. C. 7.66x. D. 25.38x.

Q: An Arthur Corp. 25 put option is selling for $3 when the stock is trading at $22. A. The intrinsic value is $3 and the speculative premium is 0 B. The intrinsic value is $3 and the speculative premium is $3 C. The time to expiration must be very close D. A and C

Q: Block Corp. 40 call option is selling for $6, and the common stock is selling for $41. The intrinsic value is: A. $6, and the speculative premium is $1. B. $1, and the speculative premium is $5. C. $1, and the speculative premium is $7. D. $5, and the speculative premium is $7.

Q: An investor striving for maximum leverage will generally buy options that are: A. in-the-money, or slightly out-of-the-money. B. out-of-the-money, or slightly in-the-money. C. deep in-the-money. D. at-the-money.

Q: In general, the speculative premiums (in percent) are higher for: A. high-beta, low-dividend yield stocks. B. low-beta, high-dividend yield stocks. C. high-beta, high-dividend yield stocks. D. low-beta, low-dividend yield stocks.

Q: All of the following are characteristics of LEAPS except: A. LEAPS have up to two years to expiration. B. LEAPS have generally been limited to blue-chip stocks, such as Coca-Cola, Dow Chemical, General Electric, IBM, and others. C. LEAPS have the same characteristics as the short-term options, in general. D. LEAPS generally have lower premiums because of their length.

Q: The difference between a put and a call option is that: A. a put is an option to sell common stock at a specified price while a call is an option to buy common stock at a specified price. B. a call is an option to sell common stock at a specified price while a put is an option to buy common stock at a specified price. C. a call is an option to buy common stock at a specified price while a put is the option to buy preferred stock at a specified price. D. a call is an option to sell common stock at a specified price while a put is the option to sell preferred stock at a specified price.

Q: A straddle is a combination of a put and call on: A. the same stock, with the same strike price and expiration date. B. different stocks, with the same strike price and expiration date. C. different stocks, with different strike price and expirations dates. D. the same stock, with the same the strike price and different expiration dates.

Q: Unlike a covered call writer, a naked call writer will always lose if:A. the stock price rises above the strike price, plus the speculative premium.B. the stock price declines.C. a closing transaction is executed.D. None of the above

Q: Under what circumstances can the writer of a call option expect to profit? A. Stock price declines B. Stock price remains the same C. The increase in stock price is less than the speculative premium D. All of the above

Q: An investor who wishes to take advantage of a current stock price, but does not expect to have cash available until a specific date in the future, would probably use the _________ strategy to invest in options. A. hedging B. leverage C. guaranteed price D. None of the above

Q: A major disadvantage of using call options to hedge a short position is that: A. hedging increases the risk of loss on the short sale. B. the option premium and commission reduce profit potential. C. the price of the stock may go up. D. None of the above

Q: All of the following are advantages of buying call options instead of stock EXCEPT: A. options represent an opportunity to control shares of stock without making a large dollar commitment. B. commissions on stock trading are greater than those on options trading. C. options can be quite conservative and used to reduce risk. D. All of the above are advantages

Q: The leverage strategy of buying call options is based on the idea that: A. a small change in the price of the underlying common stock can cause a large change in the price of the option. B. leverage reduces the risk of loss on the option contract. C. leverage reduces the risk of loss on the portfolio. D. None of the above

Q: At the time of expiration, the premium (price) on a call option: A. reflects risk in addition to intrinsic value. B. will be equal to the intrinsic value. C. may be above or below the intrinsic value. D. None of the above

Q: _________ is a factor which causes the speculative premium to increase. A. Volatility of the underlying stock as measured by beta B. Low dividend yield C. A long exercise period D. All of the above

Q: A put is said to be "in-the-money" when the strike price is __________ the market price. A. equal to B. greater than C. less than D. may be more than one of the above, depending on the option premium

Q: A call is said to be "in-the-money" when the strike price is __________ the market price. A. equal to B. greater than C. less than D. may be more than one of the above, depending on the option premium

Q: Beltran Industries' common stock trades at $42 per share. The 40 call option trades at $4. This option would be: A. in-the-money by $2. B. in-the-money by $4. C. out-of-the money by $2. D. out-of-the-money by $4.

Q: LEAPS: A. are long-term equity anticipation securities. B. have higher speculative premiums than regular options. C. are limited to a maximum of 2 years to expiration. D. All of the above are true

Q: Expiration dates in the option market: A. were expanded by the introduction of LEAPS. B. are variable depending on the company. C. are limited to a maximum of 9 months. D. occur every month on a 12-month calendar basis for each equity option traded.

Q: Standardized strike prices and expiration dates in the option market: A. allows for more efficient trading strategies. B. lowers the time premiums. C. allows hedgers, speculators, and arbitrageurs to all operate together. D. A and C

Q: The _____, which functions as the issuer of all options listed on the exchanges, is responsible for the liquidity and ease of operation of the options market. A. Chicago Board Options Exchange B. Options Clearing Corporation C. New York Stock Exchange D. None of the above

Q: Which of the following is NOT an advantage of listed options markets over the previous method of over-the-counter trading? A. Direct contact between buyers and sellers of options B. Standardized contract periods and exercise price C. More certainty and more efficient trading strategies D. All of the above are advantages

Q: _______ was the first organized exchange to trade options, in 1973. A. The New York Stock Exchange B. The American Exchange C. The Chicago Board Option Exchange D. The International Securities Exchange E. None of the above

Q: The International Securities Exchange: A. is an electronic communication network dealing in options. B. has taken significant market share from the Chicago Board Options Exchange. C. started trading options in 2000. D. All of the above are true

Q: Which of the following is NOT a characteristic of put and call options? A. They are contracts to buy or sell 100 shares of common stock B. There is always a specified price C. There is always a specified time period to exercise options D. All of the above are characteristics

Q: Dividends on the underlying common stock will affect the option price.

Q: The difference between selling short and buying a put is that the short seller can lose more than the initial investment.

Q: The longer the time to expiration, the higher the speculative premium per day.

Q: The total premium (option price) is a combination of a time premium and a speculative premium.

Q: The intrinsic value of a put option is equal to the strike price minus the market price of the option.

Q: The intrinsic value of a call option equals the market price minus the strike price of the option.

Q: A call can be used to cover a long position against the risk of rising stock prices.

Q: The total premium for an option consists of an intrinsic value plus a speculative premium, which declines to zero by the expiration date.

Q: Investors can buy put and call options on stock indexes, such as the Dow Jones Industrial Average and the Standard & Poor's 500.

Q: Much of the liquidity and ease of operation of the option exchanges is due to the role of the Options Clearing Corporation.

Q: An option can be defined as the right, acquired for a consideration, to buy or sell something at a fixed price within a specified period of time.

Q: If you buy one option and write one option at a different strike price on the same underlying stock, you are creating a "spread."

Q: A straddle is a combination of a put and call on the same stock with the same strike price and expiration date.

Q: LEAPS have a maximum time to expiration of 5 years.

Q: A put writer exposes himself to the risk of declining stock prices.

Q: The writer of a put agrees to sell stock at the strike price.

Q: A put is purchased for $5 with a $22 strike price. If the stock ends up at $25, the purchaser breaks even.

Q: Writers of naked call options generally expect stock prices to decline or remain stable.

Q: Calls used to cover a short sale guarantee that no loss can occur.

Q: If a stock price increased by 76.5% and the leverage for the option was calculated to be 1.5, the option price increased by 25.5%.

Q: The speculative premium of a put as a percentage of stock price represents the percent decline in the stock price necessary to break even.

Q: Generally, the longer the exercise period, the lower the speculative premium.

Q: Generally, the higher the beta, the greater the speculative premium.

Q: A naked option write is a conservative strategy.

Q: If the market price is above the strike price, a call is "in-the-money."

Q: All option contracts are adjusted for stock splits, stock dividends, or other distributions.

Q: If an option is traded on more than one exchange, it may be bought, sold, or closed out on any exchange.

Q: Long-term equity anticipation securities (LEAPS) are nothing more than a long-term option.

Q: A call option with a speculative premium of $3 and a strike price of $55 with an intrinsic value of $3 may be related to a stock that is selling for $58 per share.

Q: A call option selling for $8 with a $45 strike price on stock with a market price of $40 has a speculative premium of $3.

Q: Option contracts expire on the last Friday of the month.

Q: A put or call cannot be purchased for a life of more than the standardized periods of 3, 6, or 9 months.

Q: A put is an option to buy 100 shares of common stock at a specified price for a given period of time.

Q: The maximum possible loss on a strategy of buying put options is limited to the options premium under all circumstances.

Q: Option writers must own common stock in order to write call options on that particular stock.

Q: If an investor buys an option assuming a stock has bottomed out, but the stock continues to fall, the most he or she can lose is the price of the option, including commissions.

Q: "In-the-money" and "out-of-the-money" generally mean the same thing regarding put and call options.

Q: The popularity of options is due to the likelihood of an average investor earning superior returns.

Q: The International Securities Market is an ECN (electronic communication network) trading options and has not been a major factor in its competition with the Chicago Board Options Exchange.

Q: The International Securities Market is an ECN (electronic communication network) trading options.

Q: The Options Clearing Corporation is equally owned by its major trading exchanges.

Q: The Options Clearing Corporation functions as a middleman or broker, bringing together writers and buyers of options.

Q: Option trading thrives under volatile pricing conditions and uncertainty.

Q: The strike price refers to the premium paid by the option buyer for the right to exercise the option.

Q: Assume that a firm has warrants outstanding that allow the holder to buy one share of stock at $22 per share. Also assume the stock is selling at $28 per share and warrants are now selling at $10 per warrant. You can invest $1,000 in the stock or the warrants. Assume the stock goes to $44 and the warrants trade at their intrinsic value when the stock is at $44. Would you have a larger total dollar profit by initially investing in the stock or the warrants?

Q: Sharpie Cookies has warrants outstanding which allow the holder to purchase 2 shares of stock per warrant at $26 per share. The common stock is currently selling for $28 per share. The warrant has a market value of $6. Calculate the intrinsic value of the warrant and speculative premium.Intrinsic value = $4Speculative Premium = $2