Q&A Hero

Q: The hedge ratio is often called the option's ________. A) delta B) gamma C) theta D) beta

Q: A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has ________ intrinsic value and ________ time value. A) negative; positive B) positive; positive C) zero; zero D) zero; positive

Q: The Black-Scholes option-pricing formula was developed for ________. A) American options B) European options C) Tokyo options D) out-of-the-money options

Q: A ________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period. A) nominal model B) binomial model C) time model D) Black-Scholes model

Q: All else equal, call option values are ________ if the ________ is lower. A) higher; stock price B) higher; exercise price C) lower; dividend payout D) higher; lower volatility

Q: A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has ________ intrinsic value and ________ time value. A) negative; positive B) positive; negative C) zero; zero D) zero; positive

Q: The ________ is the difference between the actual call price and the intrinsic value. A) stated value B) strike value C) time value D) binomial value

Q: The ________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option. A) intrinsic value B) time value C) stated value D) discounted value

Q: If the Black-Scholes formula is solved to find the standard deviation consistent with the current market call premium, that standard deviation would be called the ________. A) variability B) volatility C) implied volatility D) deviance

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 MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI 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 MBI July 120 put contract (equaling 100 shares) for a premium of $3. You hold the option until the expiration date, when MBI 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 MBI July 125 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI 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 MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI 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: If the gross profit is positive and the net profit is negative, you will ________. A) let the option expire with no action B) not exercise the option C) exercise the option D) sell the option for less than the gross profit

Q: Why is the holder of an option not required to post margin under the Option Clearing Corporation rules? A) Once an option is purchased, no further money is at risk. B) The seller pays all costs. C) The credit worthiness of the holder covers all potential losses. D) The holder must post securities instead of margin.

Q: If you anticipate a dramatic decline in stock prices, which naked strategy will make you the most profit? A) long call B) long put C) short call D) short put

Q: At expiration of an option contract, which phrase describes the point at which both calls and puts have the same gross profit? A) at the money B) in the money C) out of the money D) knocked in

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 MBI 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 MBI 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

Q: Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct? I. The value of the conversion option for bond A is $125. II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices. A) II only B) I and III only C) III only D) I, II, and III

Q: Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not. A) I only B) I and II only C) II and III only D) I, II, and III

Q: A convertible bond is deep in the money. This means the bond price will closely track the ________. A) straight debt value of the bond B) conversion value of the bond C) straight debt value of the bond minus the conversion value D) straight debt value of the bond plus the conversion value

Q: When issued, most convertible bonds are issued ________. A) deep in the money B) deep out of the money C) slightly out of the money D) slightly in the money

Q: You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario? A) buy a strip. B) buy a strap. C) buy a straddle. D) write a straddle.

Q: What strategy is designed to ensure a value within the bounds of two different stock prices? A) collar B) covered Call C) protective put D) straddle

Q: What strategy could be considered insurance for an investment in a portfolio of stocks? A) covered call B) protective put C) short put D) straddle

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 strike price at expiration 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 MBI 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 MBI 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: 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: Wildwood Corp Underlying Stock price: $50.00 Expiration Strike Call Put June 45.00 8.50 2.00 June 50.00 4.50 3.00 June 55.00 2.00 7.50 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) $500 B) $700 C) $200 D) $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: Wildwood Corp Underlying Stock price: $50.00 Expiration Strike Call Put June 45.00 8.50 2.00 June 50.00 4.50 3.00 June 55.00 2.00 7.50 To establish a bull money spread with puts, you would ________. A) sell the 55 put and buy the 45 put B) buy the 45 put and buy the 55 put C) buy the 55 put and sell the 45 put D) 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: Wildwood Corp Underlying Stock price: $50.00 Expiration Strike Call Put June 45.00 8.50 2.00 June 50.00 4.50 3.00 June 55.00 2.00 7.50 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) $300 B) −$400 C) $150 D) $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: Wildwood Corp Underlying Stock price: $50.00 Expiration Strike Call Put June 45.00 8.50 2.00 June 50.00 4.50 3.00 June 55.00 2.00 7.50 Ignoring commissions, the cost to establish the bull money spread with calls would be ________. A) $1,050 B) $650 C) $400 D) $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: Wildwood Corp Underlying Stock price: $50.00 Expiration Strike Call Put June 45.00 8.50 2.00 June 50.00 4.50 3.00 June 55.00 2.00 7.50 To establish a bull money spread with calls, you would ________. A) buy the 55 call and sell the 45 call B) buy the 45 call and buy the 55 call C) buy the 45 call and sell the 55 call D) 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 Insurance August 75 call contract quoted at $8.50 and write one Texas Insurance 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 Huge-Packing August 50 call contract and sell one Huge-Packing 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 Huge-Packing August 50 call contract and one Huge-Packing 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 MBI 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, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring 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 lower 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: 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