Options

Question 1

• special type of security
• considered a contract, not a stock or bond

Answer 1

option

Question 2

• pays a premium and receives the right to exercise
• can be referred to as Owner, holder, or long
• has the right to enforce the terms of the contract
• can force a securities transaction or trade

Answer 2

The buyer

Question 3

Seller

Answer 3

• called the writer or may be said to be “short the contract”
• takes on an obligation to perform if the contract is exercised

Question 4

When the buyer buys the contract, it is called an _ ; if they sell a contract, it is called a _

Answer 4

opening buy, closing sale

Question 5

opening sale, closing purchase

Answer 5

when the seller writes the contract; if they purchase the contract back

Question 6

underlying security

Answer 6

the security that the contract is based on

Question 7

What is an options contract?

Answer 7

An options contract is a financial derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price within a specified time period.

Question 8

True or False: A call option gives the holder the right to sell the underlying asset.

Answer 8

False

Question 9

Fill in the blank: The price at which the underlying asset can be bought or sold in an options contract is known as the __________.

Answer 9

strike price

Question 10

If an option has an expiration date of January 31st and today is January 1st, how many days until expiration?

Answer 10

30 days

Question 11

What is the formula to calculate the profit from exercising a call option?

Answer 11

Profit = (Market Price of Asset - Strike Price) - Premium Paid

(CMV-XP) - Pr. = Profit

Question 12

The contract has _ based on how much the stock price is higher than the strike price.

Answer 12

intrinsic value (call)

Question 13

A call contract is in the money if

Answer 13

the stock price is higher than the strike price.

Question 14

A call contract is at the money and has no instrinsic value if

Answer 14

the stock price is equal to the strike price.

Question 15

When a stock price is lower than the strike price in a call contract,

Answer 15

the contract is out of the money. The intrinsic value is 0.00 or nothing.

Question 16

What formula will determine intrinsic value for a call contract?

Answer 16

Stock price – strike price = the intrinsic value (or, the in-the-money amount)

CMV-XP=IV

Question 17

All calls are in the money when _

Answer 17

market value of the stock is above the strike price.

Intrinsic value is the amount that a contract is in the money.

The premium of the contract is not a factor.

CMV-XP=IV

Question 18

How do you determine intrinsic value of PUT contract?

Answer 18

A put contract has intrinsic value based on how much the stock price is lower than the strike price. The contract is in the money.

Question 19

No intrinsic value is better for

Answer 19

the seller

Question 20

A contract having intrinsic value is better for

Answer 20

the buyer

Question 21

The buyer will only exercise if

Answer 21

the contract has intrinsic value.
No intrinsic value means no exercise.

Question 22

The buyer of the put has the right to sell the stock. The seller of the put has the

Answer 22

obligation to buy the stock.

Question 23

True or False) Call writers and put buyers are bearish.

Answer 23

True: Buyers of puts and writers of calls are bearish investors.

Question 24

Buyers of calls and writers of puts are

Answer 24

bullish investors.

Question 25

The _ of the contract has the obligation to buy the security from the buyer of the contract.

Answer 25

seller (writer)

Question 26

The buyer of a put contract wants the stock to

Answer 26

**go down** in price so that the contract may be exercised profitably.

Question 27

**True or False**) The buyer of a put contract may allow the option to expire unexercised.

Answer 27

**True**: This is likely to happen if the stock's market price is at or above the strike price.

Question 28

wants the stock price to remain at or above strike price and for the option to expire

Answer 28

seller of a put contract

Question 29

A person who expects the stock to increase is

Answer 29

bullish

Question 30

4 basic options positions

Answer 30

long call, long put, short call, short put

Question 31

to have the **right** or choice is to be

Answer 31

long the contract; buyer, holder, or owner of the option contract

Question 32

the seller of an option contract may be described as

Answer 32

being short the contract; the writer or seller, i.e. *the victim*

Question 33

used to establish or add to a long position

Answer 33

opening purchase

Question 34

opening sale

Answer 34

establishes or adds to a short position

Question 35

paid the premium

Answer 35

buyer/owner of contract, long | has the right

Question 36

received the premium

Answer 36

seller/writer of contract, short | has an obligation

Question 37

Expiration date for options contracts

Answer 37

11:59 ET, third Friday of the Expiry month

Question 38

Each individual options contract governs _ shares.

Answer 38

100 | contract multiplier

Question 39

Most complete description of options contracts

Answer 39

series

Question 40

opening buy

Answer 40

when a buyer buys the contract

Question 41

when the seller writes the contract

Answer 41

opening sale

Question 42

The buyer of a _ contract has a right to buy; the seller has an obligation to sell.

Answer 42

call

Question 43

put contract

Answer 43

The buyer has the right to sell; the seller has an obligation to buy

Question 44

_ of call contracts and _ of put contracts are said to be bullish as they want the stock's price to remain at or go above the strike price.

Answer 44

Buyers; sellers (writers)

Question 45

seller of a call contract, buyer of a put contract

Answer 45

are *bearish*; they want a stock's price to stay at or below the strike price.

Question 46

Intrinsic Value of call contracts

Answer 46

Stock Price - XP = IV *considered in the money if stock price>XP*

Question 47

XP - stock price =

Answer 47

intrinsic value for a put; *contract is in the money when stock price < XP*

Question 48

What is the formula to calcuate time value (TV)?

Answer 48

Intrinsic Value + Time Value = Premium | IV + TV = Pr.

Question 49

XP + premium =

Answer 49

BE for call

Question 50

MG for long calls and ML for short calls is _.

Answer 50

unlimited

Question 51

The MG for a short call and the ML for a long call is

Answer 51

the premium received, premium paid

Question 52

XP - Pr =

Answer 52

breakeven (BE) for put

Question 53

Maximum losses (ML) for being short a call

Answer 53

breakeven (BE); writer of put may end up having to purchase worthless stock

Question 54

MG for long puts

Answer 54

breakeven (BE); value begins once CMV falls below strike price

Question 55

MG and ML should be expressed as

Answer 55

the whole amount and not per share.

Question 56

expressed on a per-share basis

Answer 56

breakeven (BE)

Question 57

The exercise of a call requires that the writer of the contract deliver shares by

Answer 57

the next business day; one business day to deliver the shares allows for the purchase and regular way (T+1) settlement