2024 – 1 Which of the following is correct concerning options a One option covers 1 000 shares of stock b A

1. Which of the following is correct concerning options?

 

 

a. One option covers 1,000 shares of stock.

b. A put gives the option holder the right to buy a stated amount of securities.

c. The owner of a call is entitled to the dividends paid on the underlying shares of stock.

d. Option holders can profit on movements of the price of the underlying security.

 

2. One reason that writing options can be a viable and profitable investment strategy is that:

 

a. the option writer collects the quarterly dividends.

b. most options expire unexercised.

c. an option writer determines when the option is exercised.

d. an option writer can exercise the option to avoid a potential loss.

 

3. Warrants:

 

a. provide substantially less capital appreciation potential than the underlying stock.

b. tend to be quite costly.

c. have a stipulated price and an expiration date.

d. are not traded in the secondary markets because of their low unit costs.

 

4. Stocks options that trade in the January cycle will have contracts available that expire in:

 

a. January, February, April, and July.

b. March, June, September, and December.

c. January, February, March, and April.

d. each of the next 12 months.

 

5. For a call purchased on an organized security exchange, the strike price specifies the:

 

a. contractual price at which each of the shares of the underlying stock can be bought.

b. prevailing market price of one share of the underlying stock.

c. cost of buying one option contact based on the value of the underlying stock.

d. intrinsic value of the offsetting put.

 

6. Grant purchased one call on XYZ stock at an exercise price of $25. The market price of XYZ stock when Grant purchased the call was $24 a share. XYZ is currently priced at $30 a share. Grant paid $120 to buy the call. Grant will make ________ profit if he exercises the option today then sells the shares. Ignore all transaction-related cost.

 

a. $380

b. $480

c. $500

d. $600

 

7. One of the major disadvantages of options is:

 

a. their lifespan.

b. their cost.

c. their lack of liquidity.

d. the risk to option buyers.

 

8. The fundamental value of a put contract with a strike price of $25 when the option price is $1.50 and the underlying common stock sells for $26 is:

 

a. $150.

b. $100.

c. $0.00.

d. -$100.

 

9. Kyle believes the price of Ajax stock is about to decrease. If he wants to profit from the decline in price, he should _______ on Ajax stock.

 

a. buy a call

b. write a put

c. buy a put

d. sell a put

 

10. Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If steve closed out all of his positions at that time, he would have earned a net profit of:

 

a. $200.

b. $240.

c. $2,640.

d. $3,000.

 

11. Matt owns 500 shares of IKM stock. The market price of IKM is $51.74. Matt just sold five calls on IKM with a strike price of $50. This is known as:

 

a. writing a naked call.

b. writing a covered call.

c. creating a naked cover.

d. covering a short position

 

12. Bill owns 200 shares of EG stock. In November, The market price of EG was $15.45. Bill sold two March 16 calls on EG for $246. Between November and March, EG stock fluctuated between $14.75 and $15.85. EG paid a quarterly dividend of $0.40 per share on January 31. Over the November-March period, Bill earned:

 

a. $80.

b. $(176)

c. $336.

d. $256.

 

13. One could temporarily protect profits on a highly diversified portfolio of large company stocks by __________ options.

 

a. selling S&P 500 Index put

b. buying S&P 500 Index put

c. buying S&P 500 Index call

d. selling S&P 500 Index call

 

14. The currency option strike price of 163 means that:

 

a. $1 is worth 1.63 units of the foreign currency.

b. $1 is worth 163 units of the foreign currency.

c. one unit of the foreign currency is worth $1.63.

d. one unit of the foreign currency is worth $163.

 

15. An investor who exercised a call option on a S&P 500 ETF will:

 

a. purchase ETF shares at the strike price.

b. receive a cash settlement equivalent to the difference between the strike price and the current level of the index.

c. receive a cash settlement equivalent to the difference between the strike price and 100 time the current level of the index.

d. receive a cash settlement equivalent to the difference between the strike price and the current price of the ETF.

 

16. The seller of a futures contract:

 

a. has the option of canceling the contract the following day if the price is not acceptable to him/her.

b. is legally bound to make delivery of the specified item on the specified day.

c. receives the entire contract amount at the time the contract is made.

d. must make delivery before receiving any monies on the contract.

 

17. The amount paid at the time a futures contract is sold:

 

a. represents the maximum loss for the buyer of the contract.

b. represents the maximum profit for the buyer of the contract.

c. is simply a refundable security deposit.

d. is the total value of the goods being traded in the future.

 

18. Fred purchased a futures contract on live hogs through broker A. After purchasing the contract, Fred moved his investments to Broker B. During the transition, the contract on the hogs was forgotten. When the delivery date for the futures contract arrived:

 

a. the pigs were not delivered because Fred did not ask for them.

b. the futures contract was not exercised.

c. Fred took delivery of live hogs.

d. Broker A had to pay for the hogs.

 

19. In the futures markets, gains and losses in a contract’s value are calculated everyday and added to or subtracted from the trader’s account. This procedure is called.

 

a. checking the maintenance margin.

b. checking the maintenance deposit.

c. settling.

d. mark-to-the-market.

 

20. A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels. If the contract is quoted at a settle price of 529, then the value of one wheat futures contract is:

 

a. $529.

b. $2,645

c. $26,450

d. $9,451.80