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Series 7 by Chapter > Equity Options--Fundamentals and Basic Strategies > Flashcards

Equity Options--Fundamentals and Basic Strategies Flashcards

1
Q

Sandra buys 1 ABC Dec 70 Call at 4. Later at expiration, if ABC has fallen to 67, would Sandra have a gain or a loss?

A

A $400 loss of the premium.

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2
Q

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

A

$1.00 or 1 point

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3
Q

True or False: A 60 put with the market at 60 is at-the-money.

A

True

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4
Q

A put option gives the owner the right to ______.

A

A put option gives the owner the right to sell.

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5
Q

Long 1 XYZ Jan 80 Put at 5. Later XYZ falls to 68, and the put is liquidated at its then premium of 12.50. Result?

A

A $750 gain. The investor originally paid $500, but then received $1,250, netting a $750 gain.

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6
Q

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

A

Right to buy at 70

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7
Q

Equity options have a contract size of _____ shares.

A

Equity options have a contract size of 100 shares.

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8
Q

A call option gives the owner the right to _____.

A

A call option gives the owner the right to buy.

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9
Q

What is the maximum profit? Long 1 XYZ July 40 Put at 5.10

A

The maximum profit is the strike price - premium = 3490.00

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10
Q

What is an uncovered call position?

A

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

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11
Q

To offset an option purchase, an investor would execute a ________________.

A

To offset a purchase, an investor would execute a closing sale.

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12
Q

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

A

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

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13
Q

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

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

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14
Q

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

A

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

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15
Q

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

A
  1. The stock’s market price versus the strike price,
  2. time left until expiration, and
  3. volatility of the underlying security
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16
Q

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

A

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

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17
Q

True or False: Both the buyer and seller of an option have the right to exercise.

A

False. Only buyers can exercise the contract.

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18
Q

How would an option order ticket be marked for an investor whose initial transaction was the purchase of a call?

A

Opening purchase

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19
Q

Jim shorts 1 MNO Aug 40 Put at 4.50. MNO later falls to 32 and Jim liquidates at the intrinsic value. Result?

A

A loss of $350. Jim originally received $450, but then closed out by paying $800, netting a $350 loss.

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20
Q

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

A

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

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21
Q

What is the maximum loss? Short 1 XYZ Oct 95 Call at 3.20

A

The maximum loss is unlimited

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22
Q

The maximum loss for an option buyer is the ____________.

A

The maximum loss for an option buyer is the premium.

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23
Q

True or False: A 110 call with the market at 108 is out-of-the-money.

A

True

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24
Q

What is the breakeven point? Sell 1 RFQ Feb 25 Call at 1.70

A

The breakeven point is strike price + premium = 26.70

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25
Q

True or False: Option sellers want contracts to expire at-the-money or out-of-the-money.

A

True. If the option expires worthless, the seller would keep the premium.

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26
Q

To offset an option sale, an investor would execute a ___________________.

A

To offset a sale, an investor would execute a closing purchase.

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27
Q

How would an option order ticket be marked for an investor whose initial transaction was the sale of a put?

A

Opening sale

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28
Q

True or False: A 95 put with the market at 90 is in-the-money.

A

True

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29
Q

True or False: A 95 call with the market at 95 is in-the-money.

A

False, it is at-the-money.

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30
Q

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

A

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

31
Q

Sandra buys 1 ABC Dec 70 Call at 4. Later ABC rises to 80 and Sandra liquidates the call for 11. What is the result?

A

A $700 gain. She originally paid 4, but received 11 on the sale, netting a $700 gain.

32
Q

Jim is short 1 MNO Aug 40 Put at 4.50. If MNO rises to 44 at expiration, would Jim have a gain or a loss?

A

A gain of the $450 premium

33
Q

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

A

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

34
Q

What is the maximum risk? Buy 1 MNO Sep 120 Call at 3.80

A

The maximum risk is the premium = 380.00

35
Q

True or False: A 60 call with the market at 63 is in-the-money.

A

True

36
Q

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

A

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

37
Q

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

A

$2.00 or 2 points

38
Q

What is the maximum gain? Sell 1 RFQ Aug 70 Put at 6.50

A

The maximum gain is the premium = 650.00

39
Q

An investor holds 1 XYZ Jan 80 Put at 5. What is the result if later XYZ falls to 65, and the put is exercised?

A

A profit of $1,000. The investor needed the stock down at 75 to breakeven, and the stock fell 10 points beyond 75.

40
Q

Define a class of options.

A

All options with the same underlying interest and the same type (e.g. STC calls or STC puts)

41
Q

Short 1 MNO Aug 40 Put at 4.50. MNO falls to 30, the put is exercised and the stock is immediately sold. Result?

A

A loss of $550. The breakeven is 35.50, but the stock fell 5.50 lower than 35.50.

42
Q

True or False: Option writers want contracts to expire at- or out-of-the-money.

A

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

43
Q

Calls and puts are the two ________ of options.

A

Calls and puts are the two types of options.

44
Q

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

A

0, it is out-of-the-money

45
Q

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

A

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

46
Q

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

A

$2.00 or 2 points

47
Q

What is the maximum gain? Write 1 MNO June 35 Call at 2.70

A

The maximum gain is the premium = 270.00

48
Q

True or False: Options are derivatives since their value is based on the changing value of an underlying instrument.

A

True

49
Q

What is the maximum risk? Long 1 RFQ Nov 20 Put at 4.00

A

The maximum risk is the premium = 400.00

50
Q

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

A

True

51
Q

With options, what terms are synonymous with buyer?

A

Owner, holder, long

52
Q

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

A

$4.00 or 4 points

53
Q

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

A

$3.00 or 3 points

54
Q

With options, what terms are synonymous with seller?

A

Writer, short

55
Q

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

A

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

56
Q

The maximum gain for an option seller is the ____________.

A

The maximum gain for an option seller is the premium.

57
Q

What is the maximum loss? Sell 1 MNO Dec 40 Put at 3.50

A

The maximum loss is the strike price - premium = 3650.00

58
Q

What is intrinsic value?

A

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

59
Q

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

A

Bearish

60
Q

An investor writes 1 DEF May 55 Call at 6. Later at expiration, if DEF has fallen to 53, is there a gain or loss?

A

A $600 gain on the premium

61
Q

True or False: A 110 put with the market at 108 is out-of-the-money.

A

False, it is in-the-money.

62
Q

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

A

$1.00 or 1 point

63
Q

An investor holds 1 XYZ Jan 80 Put at 5. Later at expiration, if XYZ has held at 80, would there be a gain or a loss?

A

A loss of $500, since the option expires at-the-money

64
Q

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

A

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

65
Q

Bill writes 1 DEF May 55 Call at 6. Later DEF rises to 70 and the call is exercised, what is Bill’s result?

A

$900 loss. The writer could afford the stock rising to 61(breakeven), but the stock rose 9 points higher than 61.

66
Q

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

A

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

67
Q

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

A

Obligation to buy at 40

68
Q

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

A

Right to sell at 80

69
Q

What is time value?

A

The option’s premium minus the intrinsic value.

70
Q

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

A

0, it is at-the-money

71
Q

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

A

Bullish

72
Q

What is the maximum profit? Buy 1 RFQ May 105 Call at 2.40

A

The maximum profit is unlimited

73
Q

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

A

Obligation to sell at 55

74
Q

Define a series of options.

A

All options with the same underlying interest, expiration month, strike price and type (e.g. ABC May 60 Call)

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