SAMPLE OPTIONS QUESTIONS
T F 1. The strike price refers to the premium paid by the option buyer for the right to exercise the option.
T F 3. The Options Clearing Corporation functions as a middleman or broker, bringing together writers and buyers of options.
T F 4. Of the transactions handled by the Options Clearing Corporation, opening transactions are used to create a new position in the options market for a potential buyer or seller, while closing transactions are used to cancel an existing position.
T F 5. The popularity of options is due to the likelihood of an average investor earning superior returns.
T F 6. The intrinsic value of an option is solely a function of market price and strike price, without any consideration of risk, dividend yield, leverage, or any other factor.
T F 7. "In-the-money" and "out-of-the-money" generally mean the same thing regarding put and call options.
T F 8. 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.
T F 9. Option writers must own common stock in order to write call options on that particular stock.
T F 10. The maximum possible loss on a strategy of buying put options is limited to the options premium under all circumstances.
T F 11. A put is an option to buy 100 shares of common stock at a specified price for a given period of time.
T F 13. Option contracts expire on the last Friday of the month..
T F 14. 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.
T F 15. 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.
T F 17. If an option is traded on more than one exchange, it may be bought, sold, or closed out on any exchange.
T F 21. A naked option write is a conservative strategy.
T F 23. Generally, the longer the exercise period, the lower the speculative premium.
T F 26. Calls used to cover a short sale guarantee that no loss can occur.
T F 27. Writers of naked call options generally expect stock prices to decline or remain stable.
T F 29. The writer of a put agrees to sell stock at the strike price.
T F 30. A put writer exposes himself to the risk of declining stock prices.
T F 35. Much of the liquidity and ease of operation of the option exchanges is due to the role of the Options Clearing Corporation.
T F 36. Investors can buy put and call options on stock indexes such as the Dow Jones Industrial Average and the Standard & Poor's 500.
T F 37. The total premium for an option consists of an intrinsic value plus a speculative premium which declines to zero by the expiration date.
T F 38. A call can be used to cover a long position against the risk of rising stock prices.
T F 39. The intrinsic value of a call option equals the market price minus the strike price of the option.
T F 40. The intrinsic value of a put option is equal to the strike price minus the market price of the option.
T F 43. The difference between selling short and buying a put is that the short seller can lose more that the initial investment.
45. 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.
46. _______ 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) None of the above.
49. 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 arbitragers to all operate together.
D) a and c
50. ChevronTexaco common stock trades at $92 per share. The 90 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.
54. 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
56. A major disadvantage of using call options to hedge a short position is
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
58. Under what circumstances can the writer of a call option expect to profit?
A) stock price declines
B) stock prices remain the same
C) the increase in stock price is less than the speculative premium
D) all of the above
59. 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
61. 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.
65. 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
68. 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?
Answer Key -- options
Initial investment = 200 x $80 (16,000)
100 of the shares is worth $80 8000
100 of the shares sells for $75 7500
Option income is $600 600
Net value is +$100