Ch. 12 S7

Question 1

Identify the position: An investor shorts 1 XYZ May 50 call at 3 and is long 1 XYZ May 40 call at 5.

Answer 1

A spread, which is the sale and purchase of calls or puts

Question 2

T/F: option sellers want contracts to expire at the money or out of the money.

Answer 2

T; if the option expires worthless, the seller would keep the premium

Question 3

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

Answer 3

A right to buy at 70

Question 4

Sue sells 1 XYZ Jan 50 put. To create a short straddle, Sue must ___________.

Answer 4

Sell 1 XYZ Jan 50 call

Question 5

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

Answer 5

T

Question 6

Hill buys 1 XYZ Jun 70 put spread, Jill sells 1 XYZ Jun put with a strike price that is ________.

Answer 6

Higher

Question 7

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

Answer 7

T

Question 8

An investor sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What are the breakeven points?

Answer 8

For the call= 70+6=76
For the put=65-6=59

Question 9

Sandra buys 1 ABC Dec 70 call at 4. What is Sandra’s maximum gain?

Answer 9

Unlimited

Question 10

If a married out is established and the option expires, what happens to the investors basis?

Answer 10

The basis (cost of the stock plus the cost of the option) will stay the same even after expiration.

Question 11

An investor buys 1 DEF May 50 call at 3 and buys 1 DEF May 40 put at 1. What is the investors maximum gain?

Answer 11

Unlimited gain on the long call, $3,600 gain on the long put. Gains occur at f the stock rises or falls dramatically.

Question 12

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

Answer 12

Sell

Question 13

T/F: A combination contains two calls or two puts.

Answer 13

F; a combination, as with a straddle, consists of one call and one put

Question 14

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

Answer 14

0, it is at the money

Question 15

If Will has held ABC stock for 3 years and then buys a put on ABC stock, is the holding period affected?

Answer 15

No, once a long term holding period is established, it is not destroyed by a put purchased.

Question 16

If asked to determine basis or sales proceeds on an exercises put, remember to ________.

Answer 16

Put Down (SP-Premium)

Question 17

Long 1 TNT Aug 50 call at 5 and short 1 TNT Aug 60 call at 2. Is the spread a debit or credit? Is it bullish or bearish?

Answer 17

The larger premium is on the buy leg, so it is debit. The dominant leg is the purchase of a call, so it is bullish

Question 18

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

Answer 18

Unlimited. The investor has no protection if the stock continues to rise about the 38 breakeven.

Question 19

The maximum expiration for standard equity options is _______ months.

Answer 19

9

Question 20

Upon exercise, what must index option sellers deliver to the buyers?

Answer 20

The in the money amount of the contract (based on the close) multiplied by $100

Question 21

An investor sells 1 ABC Mar 30 call at 7 and buys 1 ABC Mar call at 3. Is this a debit or credit spread?

Answer 21

Since the larger premium is on the sell leg, this is a credit spread, sold for a net premium of 4.

Question 22

T/F: If an investor expects the US dollar to strengthen, she could profit by buying US dollar calls.

Answer 22

F; there are no US dollar calls or outs issued; therefore, all answers must be based on a world currency

Question 23

Identify the position: An investor buys 1 GDG Mar 50 call at 4 and buys 1 GDG Mar 50 put at 4.

Answer 23

A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration and strike price.

Question 24

An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. What is the investors breakeven point?

Answer 24

95-7=88 (always between strikes). For our spreads, the net premium is subtracted from the higher strike (PUT DOWN)

Question 25

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

Answer 25

T

Question 26

About option gives the owner the right to ________.

Answer 26

A put option the owner the right to sell.

Question 27

An investor is long 1 DEF Apr 35 put at 3 and short DEF Apr 30 put at 1. Is the investor bullish or bearish on DEF?

Answer 27

He is bearish. The dominant leg is the buy leg, which makes the investor the buy of a put.

Question 28

Sell 1 RST May 95 put at 8 and buy 1 RST May 80 put at 1. To profit, should the spread widen or narrow?

Answer 28

If the premium spread narrows, much of the $700 net premium is kept. Remember, SELLER and NARROW have 6 letters.

Question 29

Which has unlimited risk? 1. Long stock + short call 2. Short stock + long call 3. Short stock + short put

Answer 29

Short stock + short put

Question 30

An investor holds 1 XYZ Jan 80 Put at 5. What is her maximum gain?

Answer 30

$7,500 (strike price minus premium)

Question 31

Joe sells 1 ABC Oct 55 call. To create a debit call spread, Joe buys 1 ABC Oct call with a strike price that is ________.

Answer 31

Lower

Question 32

What is the tax result for a LEAP that was purchased at 6 and two years later sold at 2?

Answer 32

A long term capital gain of $600. Remember, a gain on an asset held greater than one year is long term

Question 33

An investor purchases 1 XRX May 60 call at 6 and writes 1 XRX May 70 call at 2. What is the investors break even point?

Answer 33

60 + 4 = 64 (always between strikes). For call spreads, the net premium is added to the lower strike (CALL UP)

Question 34

Julio bought a 75 call at 5 and later exercised the option. What is Julio’s cost basis?

Answer 34

75 + 5 = 80 (strike price plus the premium)

Question 35

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?

Answer 35

A loss of $500, since the option expired at the money

Question 36

An investors buys 100 shares of RST at 30 and sells 1 RET Oct 35 call at 2. What is the investors break even point?

Answer 36

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

Question 37

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

Answer 37

Opening purchase

Question 38

Sell 1 ABC Mar 30 call at 7 and buy 1 ABC Mar 40 call at 3. For profit, should the spread widen or narrow?

Answer 38

If the premium spread narrows, much of the $400 net premium is kept. Remember, SELLER and NARROW have 6 letters.

Question 39

An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec put at 4. What are the breakeven points for the investor?

Answer 39

70 + 8 = 78 and 70 - 8 = 62. The combined premium of 8 is added to 70 (call up) and subtracted from 70 (put down)

Question 40

What is the primary use of VIX options?

Answer 40

To give individual investors the ability to trade market volatility

Question 41

Sell 1 BLS July 40 call at 6 and buy 1 Oct 40 call at 10. Is the spread vertical or horizontal? Is it a debit or credit?

Answer 41

This is a horizontal spread (different expirations) and it is a befit spread (paid out more that it was received).

Question 42

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

Answer 42

A $600 gain on the premium

Question 43

An investor is long 1 DEF Apr 35 put at 3 and short 1 DEF Apr 30 put at 1. What is the investors maximum loss?

Answer 43

The net premium of $200. Remember, buyers cannot lose more than the premium

Question 44

An investors sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan put at 2. What is the investors strategy?

Answer 44

Stability

Question 45

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

Answer 45

Closing purchase

Question 46

What is the VIX?

Answer 46

The CBOE Volatility Index Options, which is a leading barometer of investor sentiment and market volatility

Question 47

Jim is short 1 MNO Aug 40 put at 4.50. What is Jim’s breakeven point?

Answer 47

40 - 4.50= 35.50 (strike price minus the premium of put down)

Question 48

An investor buys 1 DEF May 50 call at 3 and buys DEF May 40 put at 1. What is the investors strategy?

Answer 48

Volatility

Question 49

An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. What is the investors maximum gain?

Answer 49

$600. If the stock rises, the investor could profit starting from the breakeven of 34 up to 40.

Question 50

An investor sells 1 RST May 95 put at 8 and buys 1 RST May 80 put at 1. Is this a debit or credit spread?

Answer 50

Since the larger premium is on the sell leg, this is a credit spread, sold for a net premium of 7.

Question 51

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

Answer 51

To generate income (the premium); also note the premium provides a partial hedge against upside risk.

Question 52

What are the hours of operation for the interbank market?

Answer 52

24 hours a day

Question 53

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

Answer 53

T

Question 54

An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investors maximum loss?

Answer 54

$800. If it stays at 70, both options expire. Remember, buyers cannot lose more than the premium

Question 55

But 100 shares of IBM at 91 and also buy 1 IBM Nov 90 put at 2. If IBM later falls to 84, what is the maximum loss?

Answer 55

$300. At exercise, the stock bought at 91 can be sold at 90 ($100 loss) plus the cost of the option ($200 loss)

Question 56

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

Answer 56

Obligation to sell at 55

Question 57

The maximum gain for an option seller is the ___________.

Answer 57

Premium

Question 58

Identify the position: An investor writes 1 STC Jul 70 put at 7 and owns 1 STC Jim 60 put at 3.

Answer 58

A spread, which is the sale and purchase of calls or puts.

Question 59

T/F: maximum gains and maximum losses could be unlimited with vertical spreads.

Answer 59

F; spreads limit both gains and losses. Remember, net premium is the loss for the buyer and the gain for the seller

Question 60

The maximum expiration for LEAPS is _________ months.

Answer 60

39

Question 61

T/F: A spread consists of both a long and short option position.

Answer 61

T; a spread consists of either a long call and short call or a long put and short put

Question 62

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

Answer 62

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

Question 63

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

Answer 63

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

Question 64

An investor sells 1 BBO Jan 70 call at 4 and sells 1 BBO Jan 65 put at 2. What is this position?

Answer 64

Short combination

Question 65

Calls and outs are two ________ of options.

Answer 65

Types

Question 66

Yield based options are _______- based.

Answer 66

Yield based (rather than price based)

Question 67

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

Answer 67

$2.00 or 2 points

Question 68

An investor buys 1 ABC Mar 30 call at 7 and sells 1 ABC Mar 40 call at 3. Is the investor bullish or bearish on ABC?

Answer 68

Bullish. The dominant leg makes him a buyer of a call

Question 69

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?

Answer 69

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

Question 70

Holden buys 1 STC 65 call at 3. Later STC rises to 72 and the call is liquidated at 8.50. Is there a gain or loss?

Answer 70

Gain of $550 (determined by the difference between the $300 paid for the option and the $850 received on the sale)