04.1 Options Flashcards Preview

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Flashcards in 04.1 Options Deck (90):
1

How far is a MSFT Jan 90 call In the money with MSFT trading at $85?

A. $0
B. $5
C. $87.50
D. $90

A. $0

Rationale:
The stock is worth $85–the option would let you buy it for $90. Sound good? No. It's out of the money by $5.

2

How far are the IBM Aug 70 calls in the money if IBM trades at $77?

A.$0
B. $7
C. $77
D. $10

B. $7

Rationale:
You can "call up" by $7 from the strike price to the market price, so the call is in the money by $7.

3

An investor is long an IBM Mar 90 call @3. With IBM @94.75, the investor closes the option for its intrinsic value. He has a:

A. Loss of $175
B. Gain of $475
C. Loss of $300
D. Gain of $175

D. Gain of $175

Rationale:
His breakeven point is $93, so he makes anything above and beyond $93.

4

An investor sold an IBM Mar 90 call @3. With the underlying security trading @92, she closes the contract for its intrinsic value. She has a:

A. Gain of $9,000
B. Gain of $100
C. Loss of $9,000
D. Loss of $100

B. Gain of $100

Rationale:
For a seller find the breakeven point. If the stock fails to reach the breakeven point, the seller wins. The amount that it fails to reach the breakeven point is the amount that the seller makes.

5

A MSFT Jun 65 put @3 has how much intrinsic value with MSFT @65?

A. $2
B. $65
C. $3
D. $0

D. $0

Rationale:
Options that are at the money have no intrinsic value. There is only intrinsic value when the option is IN the money; in fact "in-the-money" and "intrinsic value" are synonymous. Does it have intrinsic value? If so, it's in the money, and the amount that it's in the money IS the intrinsic value.

6

An IBM Mar 75 put @3 has how much time value with IBM
@74?

A. $0
B. $1
C. $2
D. $3

C. $2

Rationale:
The option is in the money by $1 (intrinsic value). The other $2 in the premium, then, is called time value.

7

An investor writes an XYZ Mar 75 put @4. With XYZ @74, he closes the contract for its intrinsic value. He has a:

A. Gain of $400
B. Gain of $100
C. Gain of $300
D. Loss of $400

C. Gain of $300

Rationale:
This type of option question really involves just two steps. Step one, put the premium they give you in the correct side of your T- chart. In this question put "4" in the credit column, because all sells/writes/shorts go in the credit column. Step two is to find the intrinsic value of the option and write it on the opposite side of the T-chart. Intrinsic value of a 75 put with the stock down at $74 is that difference, $1. So write $1 in the debit column and you see there is a $3 per-share gain.

8

An investor sells an IBM May 80 put @3.50. With IBM @78, she closes the option for intrinsic value. She has a:

A. Gain of $350
B. Loss of $350
C. Loss of $150
D. Gain of $150

D. Gain of $150

Rationale:
The stock failed to reach the breakeven point by $1.50, so that's what the seller makes.

9

What is the breakeven on an XYZ Feb 75 put @2.50?

A. $77.50
B. Depends on whether the investor bought or sold this option
C. $75.00
D. $72.50

D. $72.50

Rationale:
Buyers and sellers ALWAYS breakeven at the same price. For puts, that would be: strike price minus premium.

10

With XYZ trading @52.50, which of the following options is in the money?

A. XYZ Mar 55 call
B. XYZ Mar 55 put
C. XYZ Mar 50 put
D. XYZ Mar 45 put

B. XYZ Mar 55 put

Rationale:
A Mar 55 put would allow you to sell a $52.50 stock for MORE than it is actually worth.

11

Tom sold an ARQ Mar 65 put @3. With ARQ @60, Tom receives an assignment notice. He ends up with a:

A. Loss of $300
B. Gain of $20
C. Gain of $300
D. Loss of $200

D. Loss of $200

Rationale:
Takes in 3 and pays out 5. It's really as simple as that.

12

A MSFT Jun 50 call @1.50 is in the money as soon as MSFT trades above:

A. $48.50
B. $50.00
C. $49.00
D. $51.50

B. $50.00

Rationale:
Don't confuse "in the money" with "breakeven". The breakeven point might be $51.50, but that's not what the question asked. The question asked when a call with a strike price of $50 is in the money. Above $50. Call UP.

13

What is the intrinsic value of a MSFT Jan 90 call @1.45 with MSFT common stock trading at $85?

A. $6.45
B. Zero
C. $5.00
D. $86.45

B. Zero

Rationale:
How could a "90" call be in the money if the stock is only trading at $85?

14

With MSFT trading at 83.12, MSFT Aug 80 calls @4 are:

A. Not enough information given in the question
B. In the money
C. Out of the money
D. At the money

In the money

Rationale:
Don't confuse "in the money" with "breakeven". Breakeven is a very personal matter. Ten different buyers could have ten different breakeven points on the same option series. It depends on what they paid for the call or put. One guy pays $1 for a June 50 call, another pays $2 for the same call. Thafs two different breakeven points. But it has nothing to do with whether the option is in the money. A call is in the money as soon as the stock is higher than the strike price, end of story. As soon as the stock goes above $80 in this question, the call is in the money.

15

When may an American style option be exercised?

A. Anytime after expiration
B. At 1159 PM on the 3rd Friday , following the third Saturday of the month
C. Only upon expiration of the contract
D. Any time up to expiration of the contract

D. Any time up to expiration of the contract

Rationale:
Associate the "A" in "American" with the "a" in anytime." Associate the UE " in "European" with the "e" for
"expiration." As if you didn't already have enough stuff to remember.

16

Your customer owns 100 shares of MSFT. To generate income, he should:

A. Buy a put
B. Buy a call
C. Sell a put
D. Sell a call

D. Sell a call

Rationale:
To generate income you have to sell/write/short something. If you're bullish on the stock, sell the bear position bears sell calls. Now, if your stock goes up, you make money on the stock. And, if the stock goes the other way, at least you made the premium and let the call expire.

17

Your customer is short 100 shares of MSFT. For best protection, he should:

A. Sell a call
B. Sell a put
C. Buy a call
D. Buy a put

C. Buy a call

Rationale:
To best protect a stock position you have to buy an option. You're bearish on the stock, so you bet the other way with an option—buy a call.

18

Your customer is short 100 shares of MSFT. To increase yield, he should:

Rationale:
A. Buy a put
B. Sell a call
C. Buy a call
D. Sell a put

D. Sell a put

Rationale:
To increase yield/return you have to sell an option. If you're bearish on the stock (short), you sell the bull position—bulls sell puts.

19

An investor who is short stock gets protection when she:

A. Sells a put
B. Sells a call
C. Buys a call
D. Buys a put

C. Buys a call

Rationale:
"Protect" means buy. Short stock, so go the other direction with the option buy a call.

20

Long 100 shares XYZ @40. Short XYZ Oct 50 call @2.25.
What is the maximum loss in this hedged position?

A. 12.25 per share
B. Unlimited
C. 37.75 per share
D. 10.00 per share

C. 37.75 per share

Rationale:
Many students assume that if you sell a call, you will end up selling stock at that price. No. Only if the stock goes ABOVE the strike price. If the stock goes the other way, that call you sold is history, worthless, forgotten. You're on your own now, Mr. Covered Call, suffering like any other stock buyer. If that stock drops from $40 to zero, you lose $40, just like the rest of us. Oh yeah, you did take in S2.25 a share in call premiums, you lucky Devil.

21

An investor is short a MSFT Jun 60 put. Which position would complete the straddle?

A. Long MSFT Jun 50 call
B. Short MSFT Jun 50 put
C. Long MSFT Jun 50 put
D. Short MSFT Jun 60 call

D. Short MSFT Jun 60 call

Rationale:
In a straddle, both lines look exactly the same only
difference is one is a put, the other is a call.

22

An investor anticipating volatility buys an XRQ Oct 60 call @4 and an XRQ Oct 60 put @3. If XRQ is trading @54 at
expiration and the investor closes both positions for their intrinsic value, what will be his gain or loss?

A. $100 loss
B. $700 loss
C. $700 gain
D. None of the choices listed

$100 loss

Rationale:
The investor paid total premiums of $7, so the breakevens are $7 above and $7 below the strike price of 60.
He would have been even at $53, but the stock only made it to $54, which is why he loses $1 per share, or $100 total.

23

An investor who anticipates stability, sells a Jun 90 call @4 and a Jun 90 put @3.50. He closes both positions for their intrinsic value at expiration, when the underlying stock is trading at $111. What is the investor's gain or loss per share?

A. $13.50 gain
B. Unlimited
C. $13.50 loss
D. $5 loss

C. $13.50 loss

Rationale:
The seller takes in $7.50, so he wont lose unless the stock moves up or down by more than $7.50. The stock moved up by $21, so he loses the difference between $21 and
$7.50, or $13.50 per share.

24

An investor purchased shares of XYZ @50. XYZ now trades at $58. The investor feels that the stock will not rise over the next several weeks. Therefore, you recommend that he:

A. Sell near-term XYZ puts
B. Sell near-term XYZ calls
C. Buy near-term XYZ calls
D. Purchased near-term XYZ puts

B. Sell near-term XYZ calls

Rationale:
Perfect time to sell a covered call—you're convinced the stock is going nowhere, but somebody is willing to bet you otherwise.

25

An investor feels that ABC is headed for a sharp decline.
Therefore, this investor might do all of the following except:

A. Purchase ABC straddles
B. Write ABC calls
C. Sell ABC short
D. Purchase ABC puts

A. Purchase ABC straddles

Rationale:
In anticipation of a market decline, speculators buy puts, sells calls, and sell stock short. If you expect a stock to drop, why buy the call that's included in the straddle? A straddle is purchased when the speculator does not want to make a directional bet. If he felt he could call the direction, he would not waste money on the other option
that makes the thing a straddle.

26

Long IBM Mar 90 call. Short IBM Mar 100 call. The investor will profit if the difference in premiums:

A. Narrows
B. Elongates
C. Widens
D. Changes

C. Widens

Rationale:
Debit = widen. The investor bought the more valuable call, so he has a debit spread. The right to buy at 90 is more
valuable than the right to buy at 100, yes?

27

Long IBM Mar 90 call @6. Short IBM Mar 100 call @2. What is the investor's max loss and max gain, respectively?

A. 6, 2
B. 2, minus initial debit
C. 2, 6
D. 4, 6

D. 4, 6

Rationale:
The investor starts with a debit of4,so4isallhecanlose. The max gain and max loss always add up to the difference in strike prices (10), so the other number is 6. This was the only choice where the gain and loss added up to 10, so it had to be the right answer.

28

What is the breakeven for the following position?
Long ORCL May 30 call @3.30
Short ORCL May 20 call @6.50

A. $23.50
B. $9.80
C. $23.20
D. $2.20

C. $23.20

Rationale:
Take the difference in premiums, $3.20, and add that to the lower strike price. For call spreads add the net premium to the lower strike price, just like this.

29

What is the breakeven for the following position?
Long ORCL May 30 put @4.50
Short ORCL May 20 put @1.90

A. $2.60
B. $27.40
C. $6.40
D. $22.60

B. $27.40

Rationale:
Take the difference in premiums, $2.60, and subtract that from the higher strike price. For put spreads subtract
the net premium from the higher strike price to get the breakeven.

30

The investor will profit if the difference in premiums:
Short IBM Mar 90 call
Long IBM Mar 100 call

A. Elongates
B. Narrows
C. Widens
D. Achieves parity

B. Narrows

Rationale:
Credit = narrow, expire. The investor sold the more valuable call, so he starts with a credit. The right to buy at 90 is worth more than the right to buy at 100.

31

A MSFT Jun 50 call is in the money when MSFT trades at which of the following prices?

A. $48.00
B. $51.00
C. $49.00
D. $50.00

B. $51.00

Rationale:
A call is in the money when the market price of the stock is
higher than the strike price of the call. We could also say that a call is in the money when the strike price is lower than the market price.

32

What is the maximum loss on this position?
Long 100 shares XYZ @55
Long XYZ Mar 50 put @2.25

A. None of the choices listed
B. $500
C. $725
D. $275

C. $725

Rationale:
This is basically an insurance policy with a $500 deductible and a $225 premium. If you buy at $55 and sell at $50, you can lose $500. Your premium isn't coming back, either, just like in an insurance policy.

33

If an investor has sold an XYZ Nov 50 put, which of the
following positions will complete the straddle?

A. Sell XYZ Nov 50 call
B. Sell XYZ Nov 50 call
C. Buy XYZ Nov 50 call
D. Sell XYZ Dec 50 call

A. Sell XYZ Nov 50 call

Rationale:
Every item in both lines is the same, except one is a call, the other a put.

34

Long IBM Mar 70 call @4. Short IBM Mar 60 call @8. The maximum loss on this position is:

A. Unlimited
B. $1,000
C. $400
D. $600

D. $600

Rationale:
The maximum gain is the $4 per share that the investor starts out with in his credit column. The difference in strike prices, $10, minus that $4 gives you your answer-$6 per share or $600 total. For a spread, your answer could
never be "unlimited"

35

Buy 1 IBM Mar 70 call @4. Sell 1 IBM Mar 60 call @8. The
maximum gain on this position is:

A. $600
B. Unlimited
C. $400
D. $1,000

C. $400

Rationale:
If you start with a credit of $4 per share, that's all you can make.

36

Buy 1 XYZ Oct 50 call @2. Buy 1 XYZ Oct 50 put @2. This
position will prove profitable if XYZ trades above which price?

A. 45
B. 53
C. 54
D. 46

C. 54

Rationale:
The breakeven points are $4 above and below 50. $54 would be a breakeven, so above $54 would be a gain. Remember that buyers don't make money unless and until
the stock goes beyond the breakeven point. $46 was the other breakeven, but the stock has to be below—not above—that for the position to be profitable.

37

This position will prove profitable if XYZ trades at which price?
Sell 1 XYZ Oct 50 call @2
Sell 1 XYZ Oct 50 put @2

A. 48
B. 55
C. 42
D. 57

A. 48

Rationale:
The writer always wants the opposite of the buyer. The writer wants the stock inside the two breakevens—inside $54 and $46. The only price within that range was $48.

38

Jill sold an ABC Jun 45 put @2 She will profit as long as the underlying security trades:

A. Below $42.25
B. Above $43.00
C. Below $45.00
D. Below $40.00

B. Above $43.00

Rationale:
The writer needs the stock to stay above the breakeven on a put; just like the writer needs the stock to stay below the breakeven point on a call.

39

Your investor is short 100 shares XYZ @50 and long an
XYZ Oct 55 call @2. Therefore, her maximum gain is:

A. Unlimited
B. $4,800
C. $5275
D. $5225

B. $4,800

Rationale:
If you short a stock at $50, $50 is the maximum you can make, and that's only in the unlikely event that it goes to zero. Since you paid $2 a share to protect yourself against
a sudden upsurge, you have a "2" in your debit column, right? Well, if you have "50" in the credit column and "2" in the debit column that's a gain of $48 per share, or $4,800.

40

Your customer sold short 100 XYZ @55. With the stock currently @49, you would recommend that he protect his
position by:

A. Buying an XYZ Oct 50 put
B. Writing an XYZ Oct 50 put
C. Writing an XYZ Oct 45 put
D. Buying an XYZ Oct 50 call

D. Buying an XYZ Oct 50 call

Rationale:
To protect you have to buy, so eliminate the choices. If the stock is down, you need to protect against it going up. Calls = up.

41

Dale Smith buys an XYZ Jan 50 call and writes an XYZ Jan 60 call. He will profit if:

A. The spread widens
B. The spread narrows
C. The spread elongates
D. Both options expire

A. The spread widens

Rationale:
Dale bought a more valuable call and sold a less valuable one, didn't he? Sure he did. The right to buy low is worth more than the right to buy high. Debit = widen and exercise.

42

Your investor buys an ABC Mar 65 call @2. He will complete the straddle by:

A. Purchasing an ABC Mar 65 put
B. Writing an XYZ Mar 65 call
C Buying an XYZ Mar 65 put
D. Purchasing an ABC Mar 60 put

A. Purchasing an ABC Mar 65 put

Rationale:
Read these questions very carefully! The option has to be on the same stock, right? ABC and XYZ are two different options. He has to buy an ABC put with the same everything as the call.

43

OEX Jan 650 call @7.5. If your customer sells the above position and subsequently receives an assignment notice with OEX @660, he ends up with a:

A. Loss of $250
B. Gain of $7,500
C. Gain of $750
D. Loss of $2,500

A. Loss of $250

Rationale:
These are figured just like equity options, really. He takes in $750 and would pay the buyer $1,000 for the "10" of intrinsic value. That's a loss of $250.

44

If your customer buys an ABC Jan 50 call @3.75 and writes an ABC Jan 60 call @1, he will profit if ABC trades:

A. Below $52.75
B. Above $52.75
C. At parity
D. At $52.75

B. Above $52.75

Rationale:
This is a BULL spread. Whenever the investor is long the lower strike price, it's a bull spread. So, he wants the stock above the breakeven point of $52.75.

45

Your customer is short 200 shares of XYZ @50 and short 2
XYZ Oct 45 puts @2. What is the maximum gain per share?

A. 9
B. Unlimited
C. 48
D. 7

D. 7

Rationale:
If he sells the stock at $50 and would be forced to buy it at $45, that's a gain of $5 per share. The premium is his, too, for a total of $7 per share.

46

Your customer is long 100 shares XYZ @55 and short 2
XYZ Mar 60 calls @3. His maximum loss is:

A. $4,900
B. Unlimited
C. $60
D. $5,200

B. Unlimited

Rationale:
Careful here. One of these calls is naked, totally exposed to the harsh elements of the market. He only has 100 shares, so only the first call would be covered—the other one is naked, so his max loss is still unlimited. They call that a "ratio call write," by the way, and please do not try this at home.

47

Your investor owns 100 shares of ABC @50. He sells an ABC Oct 50 call @1.50 and an ABC Oct 50 put @2.00. His maximum loss is:

A. Zero
B. $9,650
C. $5,350
D. Unlimited

B. $9,650

Rationale:
You really have to think creatively here. Usually when somebody does a short straddle the risk is that the stock could go up. This guy covers the call, though, so the risk is pointing down. If the stock drops from $50 to zero, he loses his $5,000 investment. Which is bad enough, but now some clown is going to make him buy the stock again for $50. Another $5,000 down the drain. He only took in $350, the poor guy, for a total potential loss of $9,650.

48

The ARZ Oct 50 puts are trading at a premium of S3.25. The ARZ Oct 60 puts are trading at $5.00. In order to establish a credit put spread, an investor would:

A. Sell the Oct 50 put
B. Sell the Oct 60 put
C. Both choices listed
D. Neither choice listed

B. Sell the Oct 60 put

Rationale:
To establish a credit spread the investor sells the more expensive option and buys the less expensive option.

49

If your customer is short 100 shares QRT @55, all of the following could be used to protect the position except:

A. Buy a QRT Mar 50 call
B. Sell a QRT Mar 55 put
C. Buy-stop @60
D. Buy a QRT Mar 60 call

B. Sell a QRT Mar 55 put

Rationale:
If you're short stock, you have to make plans to buy it back at a set price. Buying calls will do this, and entering a buy-stop will also make sure the investor automatically buys back the stock if it rises above the trigger price.

50

A computer chip manufacturer in Sandusky, Ohio just signed a contract to deliver chips to an importer in Australia. Payment is to be made in the Australian dollar 90 days hence. For best protection, the chip manufacturer should:

A. Buy Australian dollar calls
B. Buy Australian dollar puts
C. Sell Australian dollar calls
D. Sell Australian dollar puts

B. Buy Australian dollar puts

Rationale:
They're delivering computer chips and receiving Australian dollars in 90 days. What if those Aussie dollars are worth less or even worthless at that point? Hope somebody bought a put.

51

The manager of a bond fund is worried that interest rates are going to rise. Which type of yield-based option strategy would you recommend for protection?

A. Buy puts
B. Sell calls
C. Sell puts
D. Buy calls

D. Buy calls

Rationale:
If rates are going up, so are yields. To protect you have to buy. Buy a call. When you think something is going UP, you buy a call.

52

What is true of the following options position?
Long MXE May 70 put
Short MXE May 60 put

I. It is a bull spread
II. It is a bear spread
III. The investor wants the spread to widen
IV. The investor wants both options to go in the money

A. I
B. II, III, IV
C. I, III
D. II, III

B. II, III, IV

Rationale:
The investor is NOT long the lower strike price, so this is a bear spread. It also happens to be a debit spread, since he bought the more valuable option. A "70" put is more valuable than a "60" put, right? Debit = widen and exercise/go in the money.

53

An investor writes an ORQ Oct 65 put. How would she complete the credit spread?

A. Buy an ORQ Oct 70 put
B. Write an ORQ Oct 60 put
C. Buy an ORQ Oct 60 put
D. Write an ORQ Oct 70 put

C. Buy an ORQ Oct 60 put

Rationale:
She'd have to buy a LESS valuable option to make this a credit spread. Eliminate the "write/sell" choices first off. Then ask yourself which option is worth less than a 65 put. A 60 put would be worth less than a 65 put, since the
right to sell a stock at 60 isn't as valuable as the right to sell it at 65. By the way, I would consider this to be a rather difficult options question, harder than the typical question you'll see on the test.

54

Your customer is long 100 XYT @55 and wrote an XYT Mar 65 call @2.25. What is your customer's maximum loss
potential?

A. $52.75 per share
B. Unlimited
C. $10 per share
D. $12.25 per share

A. $52.75 per share

Rationale:
If you pay $55 for a stock and only take in $2.25, you can still lose $52.75. If that stock goes to zero, all you got was the $2.25, right?

55

Your customer buys 100 shares AZZ @45 and writes an AZZ Apr 50 call @1.85. With AZZ @52, your customer receives assignment of the short position. Which TWO of
the following are accurate?

I. Your customer sustains a loss for tax purposes
II. Your customer realizes a gain for tax purposes
III. For tax purposes your customer's cost basis in AZZ is $42.15
IV. For tax purposes your customer's

A. II, III
B. I, III
C. II, IV
D. I, IV

C. II, IV

Rationale:
If you sell the stock for more than you bought it, that's definitely a gain. Selling a call doesnt affect your cost base; it affects your proceeds. This investor sells the stock for $50 because he took in the premium of $1.85. That's total proceeds of $51.85.

56

John buys 300 shares of QRZ @35 and sells 3 QRZ Oct 35 puts @2. His maximum potential loss is:

A. $9,900
B. $20,400
C. $600
D. Unlimited

B. $20,400

Rationale:
A nasty question! But, that's not the same as an "impossible" question. He spends $10,500 on the stock. If the stock drops to zero, he loses all that, plus some clown long a put makes him pay another $10,500 to buy it again! What did he take in? $600. Pays out $21,000- takes in only $600. Hate it when that happens.

57

An investor with no other positions buys an XYZ Jun 50 call @4 when the underlying instrument upon which the
derivative is based is trading at 52. If the stock is trading at $52 at expiration and the investor closes his position for the intrinsic value, what is the investor's gain or loss?

A. $1,000 loss
B. $200 gain
C. $100 loss
D. $200 loss

D. $200 loss

Rationale:
He paid $400 for the call. It would only be worth $2 per share or $200 total with the stock at $52, right? Don't let the weird language intimidate you. The underlying instrument upon which the derivative is based" just means the stock". Options are derivatives because they derive their value from something else.

58

MSFT Jun 65 put @3 has how much intrinsic value with MSFT @65?

A. $2
B. $3
C. $65
D. None of the choices listed

D. None of the choices listed

Rationale:
There's no intrinsic value in a put that lets you sell a stock for exactly what it's worth. Time value, sure. But no intrinsic value on this option.

59

An IBM Mar 75 put @3 has how much time value with IBM @74?

A. None of the choices listed
B. $3
C. $2
D. $1

C. $2

Rationale:
If the stock is $1 lower than the put's strike price, the put has intrinsic value of $1. The rest of the $3 premium is called "time value".

60

A Japanese company is importing high-quality American-manufactured electronics equipment to be paid for in US dollars in 60 days. In order to protect against currency exchange risk, the company should:

A. Sell puts on the Yen
B. Buy puts on the US Dollar
C. Buy calls on the Yen
D. Buy puts on the Yen

D. Buy puts on the Yen

Rationale:
There are no puts or calls on the US Dollar. The Japanese importer has to pay in US Dollars, so his risk is that the
US Dollar will strengthen, which is the same thing as
saying that the Yen will drop in value. To protect against a drop in value on the Yen, he should buy a put.

61

If XYZ common stock is trading for $72, a long XYZ Oct 75 put @3 is:

A. Bullish
B. In-the-money
C. At-the-money
D. Out-of-the-money

B. In-the-money

Rationale:
Keep it simple-as soon as the stock drops below $75, the
XYZ Oct 75 put is in-the-money. Period. Exclamation
point. The premium has nothing to do with it.

62

Long 2 ABC Aug 60 calls, Short 2 ABC Aug 55 calls. This position could accurately be referred to as:

A. A debit spread
B. An equity straddle
C. A spread
D. A short straddle

C. A spread

Rationale:
Can't be a straddle if they're both calls. Can't be a debit, since the investor takes in more selling the Aug 55 calls than she'd pay to buy the Aug 60 calls.

63

Jasmyn sells an XYZ Oct 45 call @2 and an XYZ Oct 45 put
1.50. Her maximum loss is, therefore:

A. $4,150
B. Unlimited
C. $350
D. $4,500

B. Unlimited

Rationale:
She sold a naked call-unlimited max loss. The stock might go down, but it could go up.

64

Oscar Klein, with ABC common stock trading for $41, has just written an ABC Apr 40 put @2. Oscar's maximum loss is, therefore:

A. Unlimited
B. $200
C. $3,800
D. $4,100

C. $3,800

Rationale:
The stock price was irrelevant- you're welcome. If the stock drops to zero, Oscar has to give the other side $4,000. He only took in $200.

65

The maximum loss for a short put position is expressed with which of the following?

A. Premium minus intrinsic value
B. Strike price plus premium
C. Maximum loss = the premium
D. Strike price minus premium

B. Strike price plus premium

Rationale:
If you sell an ABC Oct 50 put at 2, for example, you can lose $48 per share. Strike price minus premium. Or, we could express it as "breakeven down to zero."

66

One of your customers is complaining that her portfolio of
large cap stocks is not generating enough dividend income and is not likely to rise in market value any time soon. You would best recommend that she:

A. Buy calls
B. Sell calls against the stock she owns
C. Buy puts
D. Sell puts on a large cap index

B. Sell calls against the stock she owns

Rationale:
She should write covered calls. This will generate income, and if she thinks her stocks are going nowhere, she, therefore, thinks all the calls will expire in her favor.

67

Long XYZ Nov 50 call
Short XYZ Nov 45 call
This position could accurately be referred to as:

A. A bull credit spread
B. A bear credit spread
C. A bull debit spread
D. A bear debit spread

B. A bear credit spread

Rationale:
It's a credit spread, because the Nov 45 calls are worth more than the Nov 50 calls. Then, since the position is NOTwlong-the-lower-strike," it is NOT a bull spread.

68

All of the following factor into an option's premium except:

A. Time to expiration of the contract
B. Volatility of the underlying instrument
C. Marginal tax rates
D. Strike price vs. market price of the underlying instrument

C. Marginal tax rates

Rationale:
The premium equals the buyer's chance of winning. The buyer has a better chance of winning if the underlying instrument is volatile, if the contract has lots of time on it, and if the market price is favorable compared to the strike price.

69

If a customer buys 1 ABC Aug 30 call and writes 1 ABC Aug 35 call, he has established a:

I. Bull spread
II. Bear spread
III. Debit spread
IV. Credit spread

A. II, IV
B. I, III
C. II, III
D. I, IV

B. I, III

Rationale:
You are a BULL because-u- long-lower strike. Is he? Yes. And, he paid more for the right to buy at 30 than he charged for the right to buy at 35-debit.

70

If a customer buys 1 ABC Aug 30 put and writes 1 ABC Aug 35 put he has established a:

I. Bull spread
II. Bear spread
III. Debit spread
IV. Credit spread

A. II, IV
B. I
C. II, III
D. I, IV

D. I, IV

Rationale:
He is long-the-lower-strike, so he is a BULL. He received more $ by granting the right to sell for 35 than he paid for the right to sell at 30.

71

If a customer buys 1 ABC Aug 35 call and writes 1 ABC Aug 30 call, he has established a:

I. Bull spread
II. Bear spread
III. Debit spread
IV. Credit spread

A. II, III
B. I, IV
C. II, IV
D. I, III

C. II, IV

Rationale:
He is not long-the-lower-strike, so he's a bear. He takes in
more $ granting someone the right to buy at 30 than he pays for the right to buy at 35. Credit.

72

If a customer buys 1 ABC Aug 35 put and writes 1 ABC Aug 30 put, he has established a:

I. Bull spread
II. Bear spread
III. Debit spread
IV. Credit spread

A. I, III
B. II, IV
C. II, III
D. I, IV

C. II, III

Rationale:
He is not long-the-lower-strike, so he's a bear. He pays more for the right to sell at 35 than he takes in granting someone the right to sell at 30. Debit.

73

If Jolene writes a covered call (buy-write), her breakeven will occur at:

A. Strike price minus premium
B. Stock cost plus premium
C. Stock cost minus premium
D. Strike price plus premium

C. Stock cost minus premium

Rationale:
It's simpler than it seems-if you buy stock, you can lose what you paid. If you sell a call against that stock, you can lose what you paid, minus the premium you took in.

74

Mrs. O'Leary purchased a Mar 35 put and sold a May 35 put on the same underlying security. This position is known as a:

A. Bear price spread
B. Straddle
C. Debit call spread
D. Credit calendar spread

D. Credit calendar spread

Rationale:
The test doesn't expect you to have memorized everything- rather, it expects you to eliminate answer choices (not a straddle, not a credit, etc.). This has to be a "calendar" spread, not a "price" spread, right? And, if you chose "call" spread, it's time for a break.

75

If one of your clients wants you to liquidate his short put position, you would enter which of the following orders?

A. Arbitrage
B. Closing sale
C. Closing purchase
D. Short sale

C. Closing purchase

Rationale:
If he sold it, he closes by buying it back. Closing purchase.

76

Microsoft common stock last traded @27.50. The MSFT May 25 calls trade for $2.50. Therefore:

A. The options are at the break even point
B. The options are at-the-money
C. The options have time value
D. The options are in-the-money

D. The options are in-the-money

Rationale:
Whose "breakeven point"? There are no people in the question, so no breakeven point exists. The MSFT May 25 calls were in the money as soon as MSFT traded above $25. There is no time value on the contract, only intrinsic value. The test could say the option is "at parity," as if it doesn't have enough to use against you.

77

The market attitude of a credit call spread is:

A. Intrinsic
B. Bullish
C. Bearish
D. Neutral

C. Bearish

Rationale:
Read "credit call spread" as "selling calls." A bearish position.

78

Dividends declared on ABC common stock by the board of directors at ABC, Inc. are payable to:

A. Writers of ABC put options
B. Holders of ABC common stock
C. All choices listed
D. Holders of ABC call options

B. Holders of ABC common stock

Rationale:
There is only one way to receive a dividend on ABC common stock-own ABC common stock.

79

The market attitude of a customer who has an open credit put spread is:

A. Neutral
B. Bearish
C. Bullish

C. Bullish

Rationale:
Read "credit put spread" as "selling puts." A bullish position.

80

A MSFT Oct 35 call's exercise price would be which of the following after the ex-date if MSFT declared a cash dividend of$1?

A. $35
B. $36
C. $34
D. $35.50

A. $35

Rationale:
Cash dividends do not affect strike prices.

81

The market attitude of an investor who has written a combination is:

A. Not determinable
B. Neutral
C. Bearish
D. Bullish

B. Neutral

Rationale:
He wrote two options, which will expire if the market sits
still.

82

If an investor writes an at-the- money put contract, his maximum loss is equal to:

A. The strike price plus the premium times 100 shares
B. The strike price minus the premium times 100 shares
C. The premium
D. The strike price times 100 shares

B. The strike price minus the premium times 100 shares

Rationale:
If you wrote 1 ABC Aug 50 put @3, you could lose $47 times 100 shares. Right? What did the detail "at-the-money" have to do with the question? Absolutely nothing.

83

If at expiration the strike price of the put is equal to the market price of the underlying instrument, who wins?

A. Both the buyer and the seller of the option
B. Neither the buyer nor the seller of the option
C. The buyer of the option
D. The seller of the option

D. The seller of the option

Rationale:
The seller took your money. If the option expires, he wins.

84

Please look at the following position:
MSFT May 50 calls

Now, please answer this question:
If MSFT trades for $50 at expiration, which of the following is a true statement?

A. The options are out-of-the-money
B. The buyers of the option profit
C. The sellers of the option profit only if the call position is covered
D. The sellers of the option profit

D. The sellers of the option profit

Rationale:
Sellers receive money upfront. If the option they wrote expires, they keep the premium without paying anything to close the contract. That's the maximum gain/as good as it gets for a seller.

85

An investor is convinced that XYZ common stock will trend upwards over the long haul but will likely take a temporary dip when earnings are announced next week. To generate income and profit from his belief (if accurate), he should:

A. Sell an XYZ Leaps call option
B. Sell an XYZ near-term call
C. Purchase XYZ puts
D. Purchase shares of XYZ

B. Sell an XYZ near-term call

Rationale:
To generate income, he has to sell something. Call sellers are bearish, so he should sell calls. Since he's talking about next week, let's make it near- term calls, not long-term calls.

86

What is the term used to describe options with the same expiration month, exercise price, and underlying security?

A. Open interest
B. Series
C. Type
D. Class

B. Series

Rationale:
For example, MSFT Oct 50 calls represent a series of
options.

87

Call options are associated with all of the following except:

A. Leverage
B. Bullish attitude
C. Wasting assets
D. Dividends

D. Dividends

Rationale:
Dividends are paid only to holders of common (or preferred) stock.

88

Which of the following limits the investor's profits and
losses/risks?

A. Short straddle
B. Short naked call
C. Debit spread
D. Long call

C. Debit spread

Rationale:
Long call = unlimited gain.
Short naked calls and short straddles = unlimited loss.
In any spread, the max gain and max loss are limited; they add up to the difference between the strike prices.

89

Janine owns a MSFT Aug 50 put. Janine would create a debit spread if she were to:

A. Purchased a MSFT Aug 45 put
B. Wrote a MSFT Aug 55 put
C. Wrote a MSFT Aug 45 put
D. Wrote a MSFT Aug 60 put

C. Wrote a MSFT Aug 45 put

Rationale:
She had to sell a less valuable put to make this one a debit spread.

90

Carrie Anne has purchased a MSFT May 50 call. To create a bull spread, Carrie Anne could:

A. Sell a MSFT May 50 put
B. Buy a MSFT May 50 put
C. Sell a MSFT May 55 call
D. Sell a MSFT May 45 call

C. Sell a MSFT May 55 call.