Chapter 13

Question 1

Option Series

Answer 1

All of the options of the same class, with the same expiration date, and the same exercise price

Question 2

Covered Call Writer

Answer 2

If the seller of a call owns the underlying stock

Question 3

Uncovered Call Writer

Answer 3

• If writer does not own the shares
• exposed, uncovered, naked
• may only be executed in a margin account

Question 4

How many shares of stock are in each option contract that is called “one round lot”

Answer 4

100

Question 5

Intrinsic Value

Answer 5

amount by which an option is in-the-money

• will only exist if the option is in the money
• no such thing as a negative intrinsic value
• if option is at or out of the money, intrinsic value is zero

Question 6

Time Value

Answer 6

portion of an options premium that exceeds its intrinsic value

Question 7

Option Premium Formula

Answer 7

Intrinsic Value plus Time Value

Question 8

Calls: In-, At-, and Out- of the money

Answer 8

In: if the stock market’s price is above the strike price

At: if the stock market’s price is the same the strike price

Out: if the stock market’s price is below the strike price

Question 9

Puts: In-, At-, and Out- of the money

Answer 9

In: if the stock market’s price is below the strike price

At: if the stock market’s price is the same the strike price

Out: if the stock market’s price is above the strike price

Question 10

Buyers want options to be

Answer 10

in the money

Question 11

Sellers want options to be

Answer 11

out of the money or at the money

Question 12

Time Value

Answer 12

Premium minus Intrinsic Value

Question 13

What can affect time value on an option?

Answer 13

Time left until expiration
Market volatility
Interest Rates
Supply & Demand

Question 14

LEAPS

Answer 14

LT equity options have lives up to 39 months

Question 15

American Style Exercise

Answer 15

May be exercised at any time up until the day of expiration

-all listed equities options use American style exercise

Question 16

European Style Exercise

Answer 16

May only be exercised on the day preceding expiration

-prevalent with index and currency options

Question 17

Life of a standard option

Answer 17

9 months

Question 18

Life of an index option

Answer 18

3 months

Question 19

Life of a LEAPS option

Answer 19

39 months

Question 20

Long Calls:

• Breakeven
• Max gain
• Max loss

Answer 20

BE: Strike price plus premium
MG: Unlimited
ML: Premium

Question 21

Short Calls:

• Breakeven
• Max gain
• Max loss

Answer 21

BE: Strike price plus premium
MG: Premium
ML: Unlimited

Question 22

Long Puts:

• Breakeven
• Max gain
• Max loss

Answer 22

BE: Strike price minus premium
MG: (Strike price minus premium) x100 shares
ML: Premium

Question 23

Short Puts:

• Breakeven
• Max gain
• Max loss

Answer 23

BE: Strike price minus premium
MG: Premium
ML: (Strike price minus premium) x100 shares