Textbook Chap 10 (SIE)

Investors who want to generate income on a stock position should ____ an option

sell

Put buyers are ________.

bearish

Consider the following: TNT Jun 80 call at 3 If TNT is trading at 78, how much intrinsic value does the option have?

0, It is out-of-the-money

The maximum gain for an option seller is the ______.

premium

Consider the following: STC May 60 Call at 3 If STC is trading at 61, how much time value does the option have?

$2.00 or 2 points

What method does the OCC use when issuing an exercise notice to a BD?

Random selection

An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What is the investor’s breakeven point?

30-2=28 (cost of the stock - the premium received

When may American-Style options be exercised?

O any business day up to the expiration date

What are two uses of index options?

To speculate on market movement or to hedge a portfolio

Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s strategy?

Bullish (to find the strategy for call buyers, use the phrase CALL UP)

Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much time value does the option have?

$2.00 or 2 points

With options, what terms are synonymous with seller?

Writer, short

Jim is short 1 MNO Aug 40 Put at 4.50. What is Jim’s strategy?

Bullish

Name three important factors for determining the premium of an equity option.

The stock’s market price versus the strike price, time left until expiration, and volatility of the underlying security

A call option gives the owner the right to ____.

buy

If exercised against, the writer of an equity call option is obligated to ____ the underlying stock/

sell

Sandra buy 1 ABC Dec 70 Call at 4. Does Sandra have the right or an obligation?

Right to buy at 70

With options, what terms are synonymous with buyer?

Owner, holder, long

If long stock, out option can be used to limit ______ risk.

downside

T/F: To hedge a stock position, buying options provides more protection than writing options.

True. When long stock, investors may buy a put. When short stock, investors may buy a call

What is intrinsic value?

The amount by which the option is in-the-money

Write 1 DEF May 55 Call at 6. DEF rises to 63 and the investor closes the position at a premium at 9. What’s the result?

A $300 loss since the investor received $600, but paid $900. Closing out means to execute the opposite transaction.

An investor writes 1 DEF May 55 Call at 6. Does she have a right or an obligation?

Obligation to sell at 55

If short stock, a call option can be used to limit _____ risk.

upside

A call option is in-the-money when the market price is ______ the strike price.

UP above

Consider the following: BNB Jan 30 Put at 2 If BNB is trading at 30, how much intrinsic value does the option have?

0, it is at-the-money

T/F: A 90 put with the market at 09 is in-the-money.

true

A mutual fund portfolio manager wanting to generate income would engage in what option strategy?

Covered call writing

Put buyers and call writers are ____.

bearish

A put option is in-the-money when the market price is _______ the strike price.

DOWN

An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. Is the investor bullish or bearish on IBM?

Bullish since they are long the stock. the put is purchased to protect downside risk

Once a firm is randomly selected by the OCC to receive the exercise notice, how will it in turn assign the notice?

Random selection, first-in/first-out (FIFO), or any other fair and equitable method

Consider the following: STC May 60 Call If STC is trading 61, how much intrinsic value does the option have?

$1.00 or 1 point

Put seller are ______.

bullish

T/F: Option writers want contracts to expire at-or out-of-the-money

true. for options at- or out-of-the-money, the seller would retain the premium (maximum gain)

T/F: Covered call writing is a conservative option strategy that is designed to generate income.

true

At what time do equity options stop trading?

4:00p.m. ET on the third Friday of the expiration month

By what time must equity options be exercised?

5:30 p.m. ET on the third Friday of the expiration month

If exercised against, the writer of an equity put option is obligated to ____ the underlying stock

buy

What positions would be appropriate for an investor who is bullish on the S&P 500 Index?

Buy SPX (S&P 500) Calls or Sell SPX (S&P 500) Puts

What is time value?

The option’s premium minus the intrinsic value.

An investor buys an OEX May 475 call at 10. What is his maximum loss?

The premium of $1,000 (the value of 10 x $100)

T/F: To close (sell) or to exercise for profit, option buyers want contracts to become in-the-money.

true

Sandra buys 1 ABC December 70 Call at 4. What is Sandra’s breakeven point?

70 + 4 = 74 (strike price + premium or CALL UP)

An investor writes 1 DEF May 55 Call at 6. What is the breakeven point?

55 + 6 = 61 (strike price + premium or CALL UP)

T/F: A 110 call with the market at 108 is out-of-the-money

true

The ________ issues and guarantees option contracts

Options Clearing Corporation (OCC)

An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. Is the investor bullish or bearish on XYZ?

Bearish since the investor is short the stock. The call is purchased to protect upside risk.

An investor holds 1 XYZ January 80 Put at 5. What is her breakeven points?

80-5=75 (strike price minus premium or PUT DOWN)

Consider the following: TNT Jun 80 Call at 3 is trading at 78, how much time value does the option have?

$3.00 or 3 points

An investor writes 1 DEF May 55 Call at 6. What is the investor’s strategy?

Bearish

Consider the following: ABC Sep 45 Put at 5 If ABC is trading at 41, how much time value does the option have?

$1.00 or 1 point

T/F: Options are derivatives since their value is based on the changing value of an underlying instrument.

true

T/F: Both the buyer and seller of an option have the right to exercise

False. Only buyers can exercise the contract

Call sellers are _______.

bearish

An investor sells short 100 shares of MNO at 35 and sells 1 MNO Jan 30 put at 3. What’s the investor’s breakeven point?

35+3=38 (short sale proceeds + premium received)

T/F: A 110 put with the market at 108 is out-of-the-money

false, it is in-the-money

The maximum loss for an option buyer is the ______.

premium

Calls and put are the two _____ of options.

types

What are the specifics regarding the expiration of equity options?

They expire at 11:50 p.m. ET on the third Friday of the expiration month

When must a firm provide a copy of the Option Disclosure Document (ODD) to a client?

At or prior to account approval

An investor buys an OEX May 475 call at 10. What is his breakeven point?

475 + 10 = 485 (strike price plus the premium or CALL UP)

T/F: A 60 put with the market at 60 is at-the-money.

true

Options will only have intrinsic value if they are ____ -the-money.

in

Is there any difference between the exercise of the index option and an equity option?

Yes, index options are cash-settled while equity options are settled by delivery of a specific security

An investor buys an OEX May 475 call at 10. what is his strategy?

Bullish on the S&P 100 Index

T/F: An investor may buy calls to speculate on a stock going up in price or to hedge a short position

true

Consider the following: ABC Sep 45 Put at 6 If ABC is trading at 41, how much intrinsic value does the option have?

$4.00 or 4 points

Identify the acronym: OCC

Options Clearing Corportation

What is an uncovered call position?

The sale of a call (obligation to sell) without owning the stock

An investor holds 1 XYZ January 80 Put at 5. What is her strategy?

Bearish (to find strategy for put buyers, use the phrase PUT DOWN)

Call buyers are _____.

bullish

T/F: A 95 call with the market at 95 is in-the-money.

False, it is at-the-money

When may European-Style options be exercised?

Only on the expiration date

Buy 1 ABC Dec 70 Call at 4. When ABC rises to 80, the call is exercised and the stock is immediately sold. Result?

A $600 profit since the investor is bullish and the stock rose 6 points above the breakeven point of 74

Call buyers and put writers are ________.

bullish

T/F: A 60 call with the market at 63 is in-the-money

true

Jim is short 1 MNO Aug 40 at 4.50. Does Jim have a right or an obligation?

Obligation to buy at 40

To protect a long position, an investor would ____ a ____ option as a hedge.

buy, put

T/F: An investor who is long 100 shares of ABC stock and long an ABC put is bearish on the stock

false. the purchase of the put is designed to protect against downward price movement.

Jim is short 1 MNO August 40 Put at 4.50. What is Jim’s breakeven point?

40 - 4.50 = 35.50 (strike price minus the premium or PUT DOWN)

By selling a call and receiving the premium, covered call writers sacrifice the stock’s future ______ potential

upside

A put option gives the owner the right to ______.

sell

What is a covered call position?

The sale of a call (obligation to sell) against stock that is owned

An investor holds 1 XYZ Jan 80 Out at 5. Does she have a right or an obligation?

Right to sell at 80

The maximum expiration for standard equity options is ___ months

9

Equity options have a contact size of ____ shares.

100