Transcript
Chapter Two
Basic Principles of Stock Options
Multiple Choice
A person who buys an option may do any of the following except
extend it.
exercise it.
sell it.
allow it to expire.
ANSWER: A
An option whose striking price is above the stock price is
out-of-the-money.
in-the-money.
at-the-money.
cannot be determined.
ANSWER: D
An option that has intrinsic value is
in-the-money.
out-of-the-money.
at-the-money.
worthless.
ANSWER: A
All of the following are true except
an in-the-money option has intrinsic value.
an out-of-the-money option is worthless.
an at-the-money option has no intrinsic value.
an out-of-the-money option has no intrinsic value.
ANSWER: B
All of the following are true except
the higher the striking price, the greater the value of a put option.
the higher the striking price, the greater the value of a call option.
the higher the stock price, the greater the value of a call option.
the lower the stock price, the greater the value of a put option.
ANSWER: B
The number of options in existence at a time is measured by
open interest.
volume.
volume minus open interest.
open interest minus volume.
ANSWER: A
Which of the following is not possible?
volume 110, open interest 100
volume 100, open interest 110
volume 0, open interest 100
volume 0, open interest – 100
ANSWER: D
The guarantor of option trades is the ______________.
SEC
OCC
CFTC
FDIC
ANSWER: B
Options trade on all of the following except the _____________________.
American Stock Exchange
New York Stock Exchange
Philadelphia Stock Exchange
Pacific Stock Exchange
ANSWER: B
The newest U.S. options exchange is the __________________.
National Stock Exchange
American Stock Exchange
International Stock Exchange
Global Stock Exchange
ANSWER: C
A LEAP is a(n)
commodity option.
gold or silver option.
long-term option.
option with a high striking price.
ANSWER: C
An option that is not fungible is most likely
an over-the-counter option.
traded at the CBOE.
listed.
about to expire.
ANSWER: A
Option striking prices are normally at
$2 intervals.
$5 intervals.
$7 intervals.
$10 intervals.
ANSWER: B
An option whose ticker ends in CH is a
March 25 call.
March 25 put.
March 40 call.
March 40 put.
ANSWER: C
An option whose ticker symbol ends in OC is a
March 15 call.
March 15 put.
March 25 call.
March 25 put.
ANSWER: B
An exchange employee who makes sure small public orders get filled quickly is the
Order Book Official.
Ombudsman.
Trade Checker.
Flow Manager.
ANSWER: A
Options are not normally
exercised early.
exercised after expiration.
exercised when out-of-the-money.
All of the above
ANSWER: D
In a profit and loss diagram,
the bend occurs at the stock price.
the bend occurs at the striking price.
there is a bend at both the stock price and the striking price.
the bend occurs at the maximum profit.
ANSWER: B
If you write a naked call,
the maximum profit is unlimited.
the maximum loss is unlimited.
the maximum loss equals the premium.
the maximum loss equals the stock price minus the striking price.
ANSWER: B
If you write a put option,
the maximum profit is unlimited.
the maximum loss is unlimited.
the maximum gain equals the premium.
the maximum gain equals the stock price minus the striking price.
ANSWER: C
OEX is symbolic for
order expiration.
the S&P 100 stock index options.
order execution.
the S&P 500 futures contract.
ANSWER: B
LEAPS are issued with durations of all of the following except __________.
1 year
2 years
3 years
10 years
ANSWER: D
True/False
1. A call option gives you the right to buy.
ANSWER: T
2. A put option is a promise to sell.
ANSWER: F
3. Options can be created, and they can be destroyed.
ANSWER: T
Selling an option as an opening transaction is called writing the option.
ANSWER: T
5. Listed options are fungible.
ANSWER: T
6. Options expire on the second Friday of the expiration month.
ANSWER: F
7. At the CBOE, options trade via the specialist system.
ANSWER: F
A European option may only be exercised at expiration.
ANSWER: T
An American call option should normally not be exercised until just before expiration.
ANSWER: T
A put writer may have to involuntarily buy shares if the put holder decides to exercise.
ANSWER: T
An option that is in-the-money must have intrinsic value.
ANSWER: T
Buying a call is the same as writing a put.
ANSWER: F
The value of a perpetual European put option is zero.
ANSWER: T
Short Answer/Problem
1. Listed below are four basic option positions. Two of these are generally bearish and two are bullish. Put them in the correct column.
buy a call write a call buy a put write a put
BEARISH
BULLISH
_______________
_______________
_______________
_______________
ANSWER: Writing a call and buying a put are bearish; buying a call and writing a put are bullish.
2. Explain the difference between an American option and a European option.
ANSWER: American options may be exercised anytime; European options may only be exercised at expiration.
