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Flashcards in Chapter 13 Deck (74)
1

With options, what terms are synonymous with buyer?

Owner, holder, long

2

A call option gives the owner the right to _____.

buy

3

With options, what terms are synonymous with seller?

Writer, short

4

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

sell

5

A put option gives the owner the right to ______.

sell

6

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

buy

7

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

True

8

Equity options have a contract size of _____ shares.

100

9

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

greater than; up

10

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

below; down

11


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

True

12


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

False, it is at-the-money

13

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

True

14

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

True

15

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

False, it is in-the-money

16


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

True

17

What is intrinsic value?

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

18

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

in-the-money

19

What is time value?

The option's premium minus the intrinsic value.

20

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

21

Calls and puts are the two ________ of options.

types

22

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

Right to buy at 70

23


Sandra buys 1 ABC Dec 70 Call at 4. What is Sandra's strategy?

She's a bull, thinks price will go up

24


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

Profit of $6/share, or $600

25


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?

loss of the premium, $4/share, $400

26

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

27


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

Obligation to sell at 55

28

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

Bearish, thinks stock will go down

29

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

Gain of $600 (the premium)

30

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

31

The maximum loss for an option buyer is the ____________.

the premium

32

The maximum gain for an option seller is the ____________.

premium

33

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

True

34


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

True

35

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

Right to sell at 80

36


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

Bearish, thinks stock will drop

37

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?

Profit of $1,000. $15/share gain, less $5/share premium, gives $10/share gain. Times 100 shares is $1,000 profit

38


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

loss of $900, the premium brings the at-the-money price to 61. 9 over that, for $900

39


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?

loss of $500, the premium

40

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

41


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

Obligation to buy at 40

42

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

Bullish, thinks stock will go up

43

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

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

44

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?

gain of $450 (the premium)

45

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

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

46

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

Opening Purchase

47


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

Opening Sale

48

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

closing sale

49

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

closing purchase

50

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

False, only buyers can execute

51


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

$1.00 or 1 point

52

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

53


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

54


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

55

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

56


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

57

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

58

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

$3.00 or 3 points

59

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

True

60

What is an uncovered call position?

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

61

What is the breakeven point? Buy 1 XYZ Jan 55 Call at 5.10

60.10

62

What is the breakeven point? Sell 1 RFQ Feb 85 Call at 2.70

87.7

63

What is the breakeven point? Long 1 MNO March 40 Put at 1.00

39

64

What is the breakeven point? Short 1 XYZ Apr 70 Put at 2.80

67.20

65

What is the maximum profit? Buy 1 RFQ May 35 Call at 2.50

it is unlimited

66

What is the maximum gain? Write 1 MNO June 60 Call at 3.60

$360.00, the premium

67

What is the maximum profit? Long 1 XYZ July 115 Put at 4.20

$11,080. If goes down to $0 get $115 minus $4.20/share

68

What is the maximum gain? Sell 1 RFQ Aug 50 Put at 4.10

$410, the premium

69

What is the maximum risk? Buy 1 MNO Sep 60 Call at 6.70

$670

70

What is the maximum loss? Short 1 XYZ Oct 110 Call at 4.80

unlimited

71

What is the maximum risk? Long 1 RFQ Nov 70 Put at 6.90

$690

72

What is the maximum loss? Sell 1 MNO Dec 65 Put at 5.30

$5,970. $65/share minus $5.30 equals $59.70/share

73

Define a series of options.

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

74

Define a class of options.

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