Options

Question 1

What would eliminate a short position in a listed option?

Answer 1

A closing purchase

Question 2

Define Opening Purchase

Answer 2

Establishes a long position

Question 3

Define Opening Sale

Answer 3

Establishes a short position

Question 4

Define Closing Purchase

Answer 4

Liquidates an existing short position

Question 5

Define Closing Sale

Answer 5

Liquidates an existing long position

Question 6

Options - Even Stock Split

Answer 6

XYZ May 30 Call (e.g. 2 for 1)

Number of Contracts: Increase (1 x 2/1 = 2)

Number of Shares: Unchanged (100 shares per contract)

Strike Price: Decrease ($30 x 1/2 =$15)

Question 7

Options - Odd Stock Split

Answer 7

XYZ May 30 Call (e.g. 3 for 2)

Number of Contracts: Unchanged

Number of Shares: Increase (100 x 3/2 = 150 shares per contract)

Strike Price: Decrease ($30 x 2/3 =$20)

Question 8

Options - Stock Dividend

Answer 8

XYZ May 30 Call (e.g. 25% dividend)

Number of Contracts: Unchanged

Number of Shares: Increase (100 x 125% = 125 shares per contract)

Strike Price: Decrease ($3,000/125 shares =$24)

Question 9

Options - Cash Dividend

Answer 9

XYZ May 30 Call

Number of Contracts: Unchanged

Number of Shares: Unchanged

Strike Price: Unchanged

Question 10

Breakeven on Covered Call

Answer 10

Stock Purchase Price - Premium Received

Question 11

Collar

Answer 11

A collar is an option strategy that involves both the writing of a covered call and the purchase of a protective put. The position is intended to reduce the risk of holding an underlying security and to lock in a sale price for the long stock position. In order to protect the stock position from downside risk, the investor pays the premium on the put. To minimize the cost of protection, the investor also sells a call against the stock position and receives premium.

For example, an investor creates the following collar on DEF stock:
Long 100 shares of DEF at $62 per share and Long 1 DEF May 60 put and Short 1 DEF May 65 call
If the price of the stock declines, the investor may put the stock to the writer of the put at $60 per share, thereby limiting the loss. On the other hand, if the price of the stock rises above $65 per share, the investor may be exercised against on the call and the stock will be called away from him at the strike price of $65.

Generally, collars are created with out-of-the-money options. The number of contracts and expiration months are identical for both the calls and puts, but the exercise price is not required to be the same. A sero cost collar (also referred to as a costless collar) is created when the premium received on the sale of the call is equal to or greater than the premium paid on the purchase of the protective put; therefore, there’s no out-of-pocket expense to the investor (other than the stock purchase).

Question 12

Ratio Writing

Answer 12

Ratio writing is considered an aggressive option strategy that involves a long stock position with an unequal number of calls written against it.

For example, an investor may:
Buy 100 shares of XYZ stock at $78 and Sell 2 XYZ October 80 calls for a combined premium of 8.