Q&A Hero

Q: If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______. A. long call B. short call C. short put D. long put

Q: Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

Q: Which of the following strategies makes a profit if the stock price stays stable? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

Q: An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor? A. $24.15 B. $25 C. $25.87 D. $27.86

Q: An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor? A. $32.50 B. $35 C. $37.50 D. $37.60

Q: What combination of puts and calls can simulate a long stock investment? A. Long call and short put B. Long call and long put C. Short call and short put D. Short call and long put

Q: Which strategy benefits from upside price movement and has some protection should the price of the security fall? A. Bull spread B. Long put C. Short call D. Straddle

Q: You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip. A. $300 profit B. $100 loss C. $500 profit D. $200 profit

Q: A covered call strategy benefits from what environment? A. Falling interest rates B. Price stability C. Price volatility D. Unexpected events

Q: A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months? A. $300 B. $200 C. $475 D. $0

Q: The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? A. Buy the call, sell the put; lend the present value of $40. B. Sell the call, buy the put; lend the present value of $40. C. Buy the call, sell the put; borrow the present value of $40. D. Sell the call, buy the put; borrow the present value of $40.

Q: The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap? A. $200 B. $300 C. $700 D. $400

Q: The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of _____. A. $300 B. $400 C. $500 D. $700

Q: The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement? A. Sell a call. B. Purchase a put. C. Sell a straddle. D. Buy a straddle.

Q: You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is _______________. A. $500B. $700C. $200D. $250

Q: You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with puts, you would _______________. A. sell the 55 put and buy the 45 putB. buy the 45 put and buy the 55 putC. buy the 55 put and sell the 45 putD. sell the 45 put and sell the 55 put

Q: You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________. A. $300B. -$400C. $150D. $50

Q: You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be _______. A. $1,050B. $650C. $400D. $400 income rather than cost

Q: You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with calls, you would _______________. A. buy the 55 call and sell the 45 callB. buy the 45 call and buy the 55 callC. buy the 45 call and sell the 55 callD. sell the 45 call and sell the 55 call

Q: A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________. A. $33; $3.50 B. $33; $31.50 C. $35; $3.50 D. $35; $35

Q: Which one of the following is a correct statement? A. Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not. B. A convertible bond consists of a straight bond plus a specified number of detachable warrants. C. Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year. D. Call options may be convertible into the stock, while warrants are not convertible into the stock.

Q: __________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed. A. Writing an uncovered call option B. Writing an uncovered put option C. Buying a call option D. Buying a put option

Q: Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________. A. $150 B. $400 C. $600 D. $1,850

Q: You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August. A. either lower than $44.25 or higher than $55.75 B. between $44.25 and $55.75 C. higher than $55.75 D. lower than $44.25

Q: You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________. A. $125 B. $450 C. $575 D. unlimited

Q: You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________. A. $120 B. $1,000 C. $11,000 D. $12,000

Q: The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________. A. $1,980 B. $4,900 C. $5,000 D. $2,080

Q: Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index? A. SPX B. DJX C. CME D. OEX

Q: A "bet" option is also called a ____ option. A. barrier B. lookback C. digital D. foreign exchange

Q: Which of the following expressions represents the value of a call option to its holder on the expiration date? A. ST - X if ST > X, 0 if ST ≤ X B. - (ST - X) if ST > X, 0 if ST ≤ X C. 0 if ST ≥ X, X - ST if ST < X D. 0 if ST ≥ X, - (X - ST) if ST < X

Q: An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option. A. an American B. a European C. an Asian D. an Australian

Q: Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins. A. are; are not B. are; are C. are not; are D. are not; are not

Q: A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase

Q: The potential loss for a writer of a naked call option on a stock is _________. A. equal to the call premium B. larger the lower the stock price C. limited D. unlimited

Q: A European put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

Q: Which one of the statements about margin requirements on option positions is not correct? A. The margin required will be higher if the option is in the money. B. If the required margin exceeds the posted margin, the option writer will receive a margin call. C. A buyer of a put or call option does not have to post margin. D. Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

Q: The maximum loss a buyer of a stock call option can suffer is the _________. A. call premium B. stock price C. stock price minus the value of the call D. strike price minus the stock price

Q: The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. II only B. II and IV only C. I, II, and III only D. I, II, III, and IV

Q: The Option Clearing Corporation is owned by _________. A. the exchanges on which stock options are traded B. the Federal Deposit Insurance Corporation C. the Federal Reserve System D. major U.S. banks

Q: The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs. A. II, III, and IV only B. I, III, and IV only C. I, II, and III only D. I, II, III, and IV

Q: You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________. A. long straddle B. naked put C. protective put D. short stroll

Q: A European call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

Q: You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________. A. time spread B. long straddle C. short straddle D. money spread

Q: You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________. A. covered call B. long straddle C. naked call D. money spread

Q: A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________. A. at the money B. in the money C. out of the money D. knocked in

Q: You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________. A. time spread B. long straddle C. short straddle D. money spread

Q: A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________. A. at the money B. in the money C. out of the money D. knocked out

Q: An American call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

Q: In 1973, trading of standardized options on a national exchange started on the _________. A. AMEX B. CBOE C. NYSE D. CFTC

Q: You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________. A. time spread B. long straddle C. short straddle D. money spread

Q: Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price. A. $1 B. $5 C. $20 D. $25

Q: Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock. A. 1 B. 10 C. 100 D. 1,000

Q: Advantages of exchange-traded options over OTC options include all but which one of the following? A. Ease and low cost of trading B. Anonymity of participants C. Contracts that are tailored to meet the needs of market participants D. No concerns about counterparty credit risk

Q: The writer of a put option _______________. A. agrees to sell shares at a set price if the option holder desires B. agrees to buy shares at a set price if the option holder desires C. has the right to buy shares at a set price D. has the right to sell shares at a set price

Q: Exchange-traded stock options expire on the _______________ of the expiration month. A. second Monday B. third Wednesday C. second Thursday D. third Friday

Q: A futures call option provides its holder with the right to ___________. A. purchase a particular stock at some time in the future at a specified price B. purchase a futures contract for the delivery of options on a particular stock C. purchase a futures contract at a specified price for a specified period of time D. deliver a futures contract and receive a specified price at a specific date in the future

Q: The initial maturities of most exchange-traded options are generally __________. A. less than 1 year B. less than 2 years C. between 1 and 2 years D. between 1 and 3 years

Q: Longer-term American-style options with maturities of up to 3 years are called __________. A. warrants B. LEAPS C. GICs D. CATs

Q: You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option. A. Max (P0, X - ST - P0) B. Min (-P0, X - ST - P0) C. Min (P0, ST - X + P0) D. Max (0, ST - X - P0)

Q: Strips and straps are variations of __________. A. straddles B. collars C. money spreads D. time spreads

Q: You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option. A. Max (-C0, ST - X - C0) B. Min (-C0, ST - X - C0) C. Max (C0, ST - X + C0) D. Max (0, ST - X - C0)

Q: A quanto provides its holder with the right to ______________. A. participate in the payoffs from a portfolio of gambling casino stocks B. exchange a fixed amount of a foreign currency for dollars at a specified exchange rate C. participate in the investment performance of a foreign security D. exchange the payoff from a foreign investment for dollars at a fixed exchange rate

Q: Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option. A. I and III only B. I and IV only C. I, II, and IV only D. III and IV only

Q: A time spread may be executed by _____. A. selling an option with one exercise price and buying a similar one with a different exercise price B. buying two options that have the same expiration dates but different strike prices C. selling two options that have the same expiration dates but different strike prices D. selling an option with one expiration date and buying a similar option with a different expiration date

Q: An Asian put option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Q: An Asian call option gives its holder the right to ____________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

Q: An American put option gives its holder the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date

Q: At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. A. Max (0, ST - X) B. Min (0, ST - X) C. Max (0, X - ST) D. Min (0, X - ST)

Q: At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration. A. Max (0, ST - X) B. Min (0, ST - X) C. Max (0, X - ST) D. Min (0, X - ST)

Q: All else the same, an American style option will be ______ valuable than a ______ style option. A. more; European- B. less; European- C. more; Canadian- D. less; Canadian-

Q: ______ option can only be exercised on the expiration date. A. A Mexican B. An Asian C. An American D. A European

Q: You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment. A. $300 profit B. $200 loss C. $600 loss D. $200 profit

Q: You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $300 profit B. $300 loss C. $500 loss D. $200 profit

Q: You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $200 profit B. $200 loss C. $500 profit D. $500 loss

Q: You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. A. $200 profit B. $200 loss C. $300 profit D. $300 loss

Q: You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls. A. I only B. II only C. I and III only D. I, II, and III

Q: You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment. A. $300 profit B. $100 loss C. $400 loss D. $200 profit

Q: You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________. A. greater; lower B. greater; greater C. lower; greater D. lower; lower

Q: Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________. A. $195,000 B. $220,000 C. $175,000 D. $215,000

Q: You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______. A. -$15 B. $200 C. $85 D. $185