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79 Cards in this Set
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If TCB is trading at 43 and the TCB Apr 40 call is trading at 4, what are the intrinsic value and time value of the call premium?
A) IV - 3, TV - 1 B) IV - 4, TV - 0 C) IV - 3, TV - 4 D) IV - 1, TV - 3 |
Answer: A
The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a min. premium of $3/share. Because the actual premium is 4, the balance of 1 represents time value. |
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Your client sells 1 naked MAV Oct 40 call at 2 when the CMV of MAV is $41. What must MAV be selling at for the client to breakeven?
A) 40 B) 43 C) 42 D) 38 |
Answer: C
The breakeven point for a call is: Strike price + Premium. The breakeven point is the same for both the buyer and writer. |
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An investor buys an ABC May 45 put at 4.25 when the stock is trading at $43. The put is in-the-money when the stock is:
A) below 38.75 B) below 40.75 C) above 47.25 D) below 45 |
Answer: D
A put is in-the-money when the underlying stock trades below the exercise price of the put. The put is in the money by 2 points. |
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All of the following would affect options premiums EXCEPT the:
A) number of contracts a client is long or short B) volatility of the underlying security C) price of the underlying security D) time to expiration |
Answer: A
The # of contracts a client is long or short would not affect option premiums. The volatility of the stock, the price of the stock and the time to expiration would all affect option premiums. |
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On exercise of the option, the holder of a long call will realize a profit if the price of the underlying stock:
A) falls below the exercise price B) falls below the exercise price minus the premium paid C) exceeds the exercise price D) exceeds the exercise price plus the premium paid |
Answer: D
To profit on a long call, the market price must exceed the strike price plus the premium paid (breakeven point). |
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The term that describes options of the same exercise price and expiration date for the same underlying security is:
A) Issue B) Type C) Series D) Class |
Answer: C
Options at the same exercise price and expiration date for the same underlying security are known as a "series" of options. |
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On exercise of the option, the holder of a put will realize a profit if the price of the underlying stock:
A) exceeds the exercise price plus the premium paid B) falls below the exercise price C) falls below the exercise price minus the premium paid D) exceeds the exercise price |
Answer: C
Breakeven for the buyer of a put is STRIKE - PREMIUM. |
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Which of the following is NOT an advantage of buying listed call options as compared to buying the underlying stock?
A) Buying a call allows greater leverage than buying the underlying stock. B) The call has a time value beyond an intrinsic value that gradually dissipates. C) Buying a call would require a smaller capital committment. D) Buying a call has a lower dollar loss potential than buying the stock. |
Answer: B
Call options allow greater leverage than buying the underlying stock and the capital requirements are smaller, allowing for a smaller loss potential. The fact that options expire (i.e. have a time value that erodes as the option nears expiration) is a disadvantage of options. Stock purchases have no time value component. |
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If MCS is trading at 43 and the MCS Apr 40 call is trading at 4.50, what is the intrinsic value and time value of the call premium?
A) IV=3, TV=4.50 B) IV=1.50, TV=3 C) IV=3, TV=1.50 D) IV=4.50, TV=0 |
Answer: C
The option is in-the-money by 3 points (CMV-STRIKE). This sets a min premium of $3/share. Since the actual premium is $4.50/sh, the balance of $1.50 represents the TV. |
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If an investor with no other positions buys 2 DWQ Jun 45 calls at 3, and he exercises the calls when the stock is trading at $47.25 and immediately sells the stock in the market, what is the investor's profit or loss?
A) $75 profit B) $75 loss C) $150 profit D) $150 loss |
Answer: D
LOSSES: 300+300+4500+4500=9600 GAINS: 4725+4725=9450 BAL: $150 LOSS |
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An investor with no other positions sells 4 DWQ Jun 45 calls at 4. The calls are exercised when the stock is trading at $47.25. What is the investor's profit or loss?
A) $700 loss B) $700 profit C) $175 profit D) $175 loss |
Answer: B
GAINS: (400*4)+(4500*4)=1600+18000=19600 LOSSES: 4725*4=18900 BAL: $700 GAIN |
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A call is in-the-money when the market price of the underlying stock is:
A) equal to the strike price. B) less than the strike price. C) more than it was at the prev. day's close. D) more than the strike price. |
Answer: D
Call options are in-the-money whenever the market price of the stock is greater than the strike price. |
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All of the following option contracts are in-the-money when XYZ is 54 EXCEPT:
A) Long XYZ 60 put B) Long XYZ 50 call C) Short XYZ 45 call D) Short XYZ 50 put |
Answer: D
Call options are in-the-money when CMV > STRIKE. Put options are in-the-money when CMV < STRIKE. |
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What is the size of one LEAPS contract?
A) 1,000 shares B) More than 1,000 shares C) There is no standard LEAPS contract size D) 100 shares |
Answer: D
Like a standard options contract, the size of a LEAPs contract is 100 shares. |
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When XYZ stock trades at 40 and an XYZ Oct 35 call trades at 5, which of the following is true?
A) The option's time value is equal to its intrinsic value B) The time value is zero C) The option is at-the-money D) The option is out-of-the-money |
Answer: B
An option's premium consists of time value and intrinsic value. In this situation, the call is in-the-money by 5 (IV=5) because the CMV of 40 exceeds the strike price of 35 by 5. If the total premium is 5 and the intrinsic value is 5, the time value must be 0. The option is at parity, which means PREM=IV. |
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Which of the following is a derivative security?
A) REITs B) ADRs C) Options D) DPPs |
Answer: C
Options are known as derivative securities because they derive their value from the underlying security. |
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If a customer is long 10 ABC Jul 50 calls at 4.50, the contracts give the holder the:
A) obligation to buy stock. B) obligation to sell stock. C) right to buy stock. D) right to sell stock. |
Answer: C
A long call gives the holder the right to buy stock. |
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A customer buys 10 ABC Jul 25 calls at 4.50. What is the total premium paid for the position?
A) 29500 B) 4500 C) 450 D) 20500 |
Answer: B
4.50*100 shs/contract*10 contracts = $4500 |
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If XYZ stock is trading at 25.75 and XYZ Jul 25 calls are trading at a premium of 2, what is the time value of the Jul 25 calls?
A) 200 B) 125 C) 0 D) 75 |
Answer: B
Time value = PREM - IV PREM= 2(200), IV=75 200-75=125 |
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ALFA closed at 37.50, the ALFA Jan 35 calls closed at 3.50, and ALFA Feb 35 calls closed at 4.60. What is the difference in the time values between the two options?
A) 2.5 B) 35 C) 37.5 D) 1.1 |
Answer: D
Jan prem = 3.50 Feb prem = 4.60 Difference = 1.10
Both options are in-the-money by 2.50 |
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XYZ closed at 41 and the XYZ Mar 45 puts closed at 5.25. The puts are:
A) at parity. B) in-the-money. C) at-the-money. D) out-of-the-money. |
Answer: B
Puts are in-the-money when the market price is below the strike price. These puts are in-the-money by 4. |
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If XYZ closed at 41.10 and the XYZ Feb 50 calls closed at .35, the calls are:
A) at parity. B) out-of-the-money. C) in-the-money. D) at the money. |
Answer: B
Calls are out-of-the-money when the market price is below the strike price. |
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If ABC closed at 24 and the ABC Mar 20 puts closed at .75, the puts are:
A) at parity. B) out-of-the-money. C) in-the-money. D) at the money. |
Answer: B
Puts are out-of-the-money when the market price is above the strike price. |
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An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24 and the investor immediately sells the stock in the market, what is the investor's profit or loss?
A) $150 loss B) $50 profit C) $50 loss D) $150 profit |
Answer: B
GAINS: 150+2400=2550 LOSSES: 2500 BAL: $50 GAIN
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An investor with no other positions buys 1 DWQ May 75 call at 6.50. If the investor exercises the call when the stock is trading at 77 and immediately sells the stock in the market, what is the investor's profit or loss?
A) $350 profit B) $350 loss C) $450 profit D) $450 loss |
Answer: D
GAINS: 7700 LOSSES: 650+7500=8150 BAL: $450 LOSS |
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An investor with no other positions sells 1 KLP Jul 40 call at 3.50. If the call is exercised when the stock is trading at 47, what is the investor's profit or loss?
A) $450 loss B) $350 profit C) $350 loss D) $450 profit |
Answer: B
GAINS: 350+4000=4350 LOSSES: 4700 BAL: $350 LOSS
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If a customer believes the price of ABC is going to fall, which of the following option strategies would be appropriate?
1. Buy calls on ABC 2. Write calls on ABC 3. Buy puts on ABC 4. Write puts on ABC |
Answer: 2 & 3
Buying puts and writing calls are bearish strategies. |
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Which of the following investors are bearish?
1. Buyer of a call 2. Writer of a call 3. Buyer of a put 4. Writer of a put |
Answer: 2 & 3
Buyers of puts and writers of calls are bearish investors because they think want the price of the stock to drop. |
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When XYZ stock trades at 40 and an XYZ Oct 35 call trades at 5, which of the following statements is TRUE?
A) The option is at-the-money. B) The option is out-of-the-money. C) The option's TV=IV D) The option is at parity. |
Answer: D
An option is at parity when its PREM = IV. A call option has IV when CMV > STRIKE. This option is in-the-money by 5 points (40-35). Because the premium is also 5, there is no time value, so the option is at parity. |
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As the underlying stock price increases, the premium of a call option generally:
A) Decreases B) Remains the same C) Fluctuates D) Increases |
Answer: D
The premium of an option changes as the market price of the underlying security moves; therefore, if the stock price increases, the premium of a call also increases. |
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Which of the following investors will purchase stock if an option is exercised?
1. Owner of a call 2. Owner of a put 3. Writer of a call 4. Writer of a put |
Answer: 1 & 4
Call buyers have RIGHT TO BUY Put sellers are OBLIGATED TO BUY |
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Which of the following investors will sell stock if an options is exercised?
1. Owner of a call 2. Owner of a put 3. Writer of a call 4. Writer of a put |
Answer: 2 & 3
Put owners have a RIGHT TO SELL Call writers are OBLIGATED TO SELL |
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Which of the following terms is synonymous with an option's market value?
A) Strike price B) Exercise price C) Multiplier D) Premium |
Answer: D
The premium is the cost or price the option can be bought or sold for in the market. |
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Listed stock options expire on the:
A) 1st business day following the day an option ceases to trade. B) same day an option ceases to trade. C) 3rd Friday of the month that begins the next cycle. D) Saturday following the day an option ceases to trade. |
Answer: D
Options expire on the Saturday immediately following the 3rd Friday of th expiration month, at 11:59 PM ET. |
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Securities options may be BEST described as:
A) Derivatives B) Roll ups C) forwards D) Futures |
Answer: A
Options are a derivative because they get their values from the underlying instrument. |
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Breakeven on a long put is the:
A) STRIKE + PREM B) CMV - STRIKE C) STRIKE- PREM D) CMV - PREM |
Answer: C
PUT BREAKEVEN = STRIKE - PREM This is the same for the buyer or seller of a put. |
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An investor establishes the following positions:
LONG 1 XYZ APR 40 CALL FOR 6 LONG 1 XYZ APR 50 PUT FOR 8
If both options are sold for intrinsic value when XYZ trades at 44, the investor realizes a loss of:
A) 100 B) 200 C) 1000 D) 400 |
Answer: D
CALL PURCHASE = 600 PUT PURCHASE = 800 TOT = 1400
CALL IV = CMV - SP (44-40) = 4 PUT IV = SP - CMV (50-44) = 6
CALL SELL = 400 PUT SELL = 600 TOT = 1000
DIFFERENCE = 400
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An investor writes 1 XYZ 280 put at 16.65. If the investor makes a closing purchase at the put's intrinsic value when the stock is at 265.25, he realizes a gain of:
A) 166.50 B) 265.25 C) 190 D) 147.50 |
Answer: C
OPENING SALE/GAINS: 16.65 (x10) CLOSING BUY/LOSS: 14.75 (x10) DIFF: 1.90 (x10) = $190 |
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If XYZ is currently trading at 32.50, which of the following is 2.50 points in-the-money?
A) LONG 1 XYZ 25 CALL B) LONG 1 XYZ 25 PUT C) LONG 1 XYZ 30 PUT D) LONG 1 XYZ 30 CALL |
Answer: D
In-the-money = IV CALL IV = CMV - SP PUT IV = SP - CMV |
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The time value of an option that is at-the-money equals:
A) its intrinsic value less premium B) its intrinsic value C) zero D) its premium |
Answer: D
The option has no IV if the STRIKE = CMV (at the money). The only value an option has is its time value, which = PREMIUM. |
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Which of the following is inversely related to the length of time an investor holds an option?
A) Intrinsic value B) Value of the underlying stock C) Volatility D) TIme Value |
Answer: D
An option's TV diminishes as the option nears expiration. The longer an option is held, the less time remains. |
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An XYZ JUN 40 PUT trading at 4 would be considered in-the-money if XYZ is trading:
A) above 44 only B) below 40 only C) below 36 only D) above 40 only |
Answer: B
PUT IV & IN-THE-MONEY when CMV < STRIKE |
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If an XYZ AUG 80 PUT is trading at 2, at which price would the option be at parity with the stock?
A) 78 B) 82 C) 80 D) Any of the above |
Answer: A
PARITY means the PREM = IV that occurs for an in-the-money option prior to expiration when the time value has eroded. This Put is in-the-money by 2 points (80-78 or STRIKE-CMV). |
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A stock currently sells for $75 per share. If a put option on the stock has an exercise price of $70 and currently sells for $0.50, the put option is:
A) at breakeven B) out-of-the-money C) at-the-money D) in-the-money
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Answer: B
This put option has zero IV & is therefore out-of-the-money by the $5 difference (STRIKE-CMV). |
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A customer writes 3 XYZ SEP 55 PUTS at 5 when the stock is trading at 53.50. How much aggregate time value do these contracts have?
A) 150 B) 350 C) 450 D) 1050 |
Answer: D
PREM-IV = TV 5-(55-53.50) = 3.50*3(contracts) = 1050
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All of the following are true about LEAPS EXCEPT they:
A) are available only in index options. B) may be exercised at any time after execution. C) have a longer life than other listed options. D) cease trading at 4 PM ET |
Answer: A
LEAPS are available on both individual stocks as well as indexes. |
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The S&P 100 Index closed on AUG 10 at 536.04. The Wall Street Journal quotes the closing premium for the OEX SEP 510 CALL at 28.90. The time value of this contract is:
A) 2.86 B) 7.14 C) 18.9 D) 26.04 |
Answer: A
CMV - SP = IV (536.04 - 510) = 26.04 PREM - IV = TV (28.90 - 26.04) = 2.86
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When stock prices are below strike prices, which of the following statements are correct?
1. Puts are in-the-money 2. Puts are out-of-the-money 3. Calls are in-the-money 4. Calls are out-of-the-money |
Answer: 1 & 4
CALLS are in-the-money when CMV > SP PUTS are in-the -money when CMV < SP |
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Which of the following determine the price of an options contract?
1. The price of the underlying stock 2. The time remaining to expiration 3. The volatility of the underlying stock |
Answer: 1, 2 & 3
All of these factors affect the price of an options contract. |
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Which of the following can be advantages of buying an option?
1. Leverage 2. To positions against a written option 3. To limit risk |
Answer: 1, 2 & 3
Purchasing an option allows one to speculate and fully participate in the price movement of 100 shs of stock at a fraction of the cost of the shares involved, thus leveraging the investment. When used to position against a written option, the purchase of an option will reduce the risk of loss involved with a single written option. Used in conjunction with a securities position, the purchase of an option can act as an insurance policy to reduce the risk of loss (hedging); therefore, options offer all of these advantages, but only for a limited period of time. |
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A customer buys an OCT 76 PUT on the Swiss Franc for a PREM of 5. the Franc closes at 74. Which of the following is true?
A) It is out-of-the-money B) It is at-the-money C) It has no time value D) It has intrinsic value |
Answer: D
When the CMV is below the strike price, PUTS are in-the-money, therefore, they have IV. |
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A call option premium increases in price by .85. What is the dollar amount of that increase?
A) 85 B) 0.85 C) 8.5 D) 850 |
Answer: A
.85*100 = 85 |
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An investor bought 1 APR KLP 40 CALL for 6 and 1 KLP APR 50 PUT for 8 when KLP was at 45. If the stock declines to 44 and both the call and the put are sold at intrinsic value, the result would be a:
A) $400 loss B) $100 loss C) $100 profit D) $400 profit |
Answer: A
LOSSES: 600+800 = 1400 IV OF CALL: CMV-STRIKE (44-40=4) IV OF PUT: STRIKE-CMV (50-44=6) GAINS: 400+600 = 1000 BAL: $400 LOSS |
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An investor buys 6 DFI FEB 60 CALLS at 2.25 each. At the time of the purchase, DFI is trading at 59.50/sh. What price would DFI stock need to reach for the investor to breakeven?
A) 60 B) 61.75 C) 62.25 D) 57.75 |
Answer:
STRIKE + PREM (60 + 2.25 = 62.25)
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An investor with no other positions buys 1 DWQ JUN 60 CALL at 3.50. If the investor exercises the call when the stock is trading at 68 and immediately sells the stock in the market, what is the investor's profit or loss?
A) $450 profit B) $350 profit C) $350 loss D) $450 loss |
Answer: A
LOSSES: 350 + 6000 = 6350 GAINS: 6800 BAL: $450 PROFIT |
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An investor with no other positions sells 1 ABC DEC 55 CALL at 4.50. If the call is exercised when the stock is trading at 57.25, what is the investor's profit or loss?
A) $225 PROFIT B) $225 LOSS C) $275 PROFIT D) $275 LOSS |
Answer: A
GAINS: 450 + 5500 = 5950 LOSSES: 5725 BAL: $225 PROFIT |
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An investor with no other positions sells 1 DEF JAN 95 PUT at 5.50. If the put is exercised when the stock is trading at 79 and the investor immediately sells the stock in the market, what is the investor's profit or loss?
A) $1050 PROFIT B) $1050 LOSS C) $550 PROFIT D) $550 LOSS
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Answer: B
GAINS: 550 + 7900 = 8450 LOSSES: 9500 BAL: $1050 LOSS |
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Your client expects KLM Corp stock to undergo a slight but long-term decrease in price. He is willing and able to take a risk to generate a small amount of income. Which of the following might be an effective strategy?
A) Buy near-term, in the money KLM PUTS B) Buy near-term, in the money KLM CALLS C) Sell KLM LEAPS PUTS D) Sell KLM LEAPS CALLS |
Answer: D
Your customer wishes to generate income, which means he must sell something, not buy it. Since he is in a position to take a risk, and expects KLM's stock price to decline long term, selling LEAPS CALLS would be a possible strategy. |
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If the S&P 500 Index closed at 350 on the day your customer purchased a 355 PUT on the Index for $500, which of the following would BEST describe your customer's position?
A) Even money B) At the money C) Out of the money D) Breakeven |
Answer: D
PUT BREAKEVEN = STRIKE - PREM (350 = 355- 5)
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With no other positions, a customer sells short 100 TIP at 40 and sells 1 TIP OCT 40 PUT at 5. At what stock price will the customer break even?
A) 50 B) 45 C) 35 D) 40 |
Answer: B
On the downside, the short position fully covers the short put and the profit is the $500 premium. On the upside above 40, the short put expires and the short stock position loses money. The first 5 points of loss (40 to 45) on the short stock position are offset by the premiums received. Above 45, losses begin and are potentially unlimited. |
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Which of the following covers a short call?
1. Long stock 2. Long a security convertible into the stock 3. Escrow receipt 4. Long a call, same strike price or less, same expiration or later
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Answer: D
All of the above |
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Which of the following is TRUE regarding option contracts that expire weekly?
A) They can only be traded for a single day B) They expire on Mondays C) They are issued every week of every month D) They tend to have lower premiums than standard contracts or long-term equity anticipation (LEAP) contracts |
Answer: D
"Weeklies" can be traded anytime during their week-long life cycle, expire on Fridays and are issued each week of the month except the week that standardized contracts would be expiring. |
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If the current OEX is valued at 487.95, which of the following option positions will be considered to be in the money?
A) JAN 485 PUT B) JAN 495 CALL C) DEC 490 PUT D) DEC 490 CALL |
Answer: C
A PUT is in the money when the CMV < STRIKE |
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Which of the following statements regarding investors who trade options that are American Style exercise is TRUE?
A) They can only be purchased or sold on the very first day they are issued. B) They can exercise their options any time prior to expiration. C) They can only close out long positions during a brief time prior to expiration. D) They can only exercise their contracts on the last day of trading (the business day preceding expiration) |
Answer: B
European Style contracts only allow to exercise on the last trading day before expiration. |
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If the Swiss Franc closes at 56, 1 SF 59 PUT is:
A) 3 points out of the money B) without intrinsic value C) 3 points in the money D) at the money |
Answer: C
PUT IV = CMV < STRIKE |
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Which of the following affects the holding period of XYZ stock, a position that has been held for 6 months?
A) 2 & 3 B) 3 & 4 C) 1 & 2 D) 1 & 4 |
Answer: C (1 & 2)
Buying a put (in or out of the money) on a stock held short term (1 yr or less) stops the holding period until the put is disposed of. |
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An investor who believes the US dollar will strengthen against the Canadian dollar should profit from which of the following strategies?
1. Buying puts on the Canadian dollar 2. Writing puts on the Canadian dollar 3. Writing a straddle on the Canadian dollar 4. Establishing a call credit spread on the Canadian dollar |
Answer: 1 & 4
The investor who is bearish on the Canadian dollar should buy puts, write calls and call spreads. Short straddles pay off when the market does not move either way. |
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An option writer liquidates a position by purchasing an option. This order must be marked as:
A) a closing sale B) an opening purchase C) an opening sale D) a closing purchase |
Answer: D
Writers liquidate (close) their short positions by purchasing back an option of the same series as the one they wrote. This order is known as a closing purchase transaction. |
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A Japanese manufacturer sells recorders to a US retailing firm. The manufacturer is to receive $1M US dollars in 90 days. How can he BEST protect himself against a decline in the dollar?
A) Sell yen calls B) Buy yen puts C) Buy yen calls D) Sell yen puts |
Answer: C
Because he is receiving US dollars, his risk is that the US dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises. |
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All of the following actions must be completed prior to a customer entering his first option trade EXCEPT:
A) approval by a sales supervisor B) delivery of an OCC Disclosure Booklet C) completion of the new account form D) completion of the options agreement |
Answer: D
Customers do not have to complete (sign) the options agreement prior to entering an order. However, under exchange rules, the agreement must be signed and returned by the customer within 15 days of account approval. |
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A foreign currency investor is long 40K Swiss francs at $0.81. If the investor buys 4 July 80 SF puts at 1.25 to hedge, the breakeven point is:
A) 0.4875 B) 0.5125 C) 0.4975 D) 0.8225 |
Answer: D
When hedging with puts, the breakeven point is the cost of the underlying investment plus premium paid ($0.81 + $0.0125 [for 1 sh] = $0.8225 or 82 1/4 cents) |
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Your client currently holds XYZ stock in her portfolio. You notice that the put-call ratio for options trading on XYZ stock has been increasing over the past several days. The increase in the ratio would indicate that:
A) investors are becoming more & more bullish on XYZ stock. B) for the underlying XYZ stock, more calls than puts are being traded. C) for the underlying XYZ stock, more puts than calls are being traded. D) for the underlying XYZ stock, straddles are being purchased. |
Answer: C
The ratio is a measure of puts traded to calls traded and is calculated by dividing the # of traded puts by the # of traded calls (puts/calls). As the ratio increases, it reflects that more puts than calls are being traded and is, therefore, a more bearish indicator of investor sentiment. |
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If an investor is long 5 Dec puts on the Canadian dollar, these options will expire in December on:
A) the 3rd Friday of the month. B) the Saturday after the 3rdFriday. C) the Friday preceding the 3rd Wednesday. D) the Wednesday after the 3rd Saturday. |
Answer: B
Currency options, like equity options, expire on the Saturday following the 3rd Friday of the expiry month. |
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A client writes 1 Apr 30 call and buys 1 Apr 40 call. This is a:
1. Bull spread 2. Bear spread 3. Debit spread 4. Credit spread |
Answer: 2 & 4
This is a call credit spread and bears sell calls. The 30 call is worth more because it has a lower strike price. Long the lower is bullish, short the lower is bearish. This is the opposite for puts. |
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A customer writes 10 XYZ Jan 60 calls at 3.50 when XYZ is trading at 61. Which of the following statements regarding gain & loss are TRUE?
1. Max gain is $56,500 2. Max gain is $3,500 3. Max loss is $63,500 4. Max loss is unlimited |
Answer: 2 & 4
For any writer, max gain is limited to the premium received (in this case $3500). For uncovered call writers, max loss is unlimited. |
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A customer wrote 10 KLM Jun 80 calls for a premium of 4.75 at a time when the market value of KLM was 81.75. What is his gain or loss if he now closes out his positions at 2.12?
A) $2630 gain B) $4750 loss C) $2630 loss D) $4750 gain |
Answer: A
If the customer sold at 4.75 and purchased at 2.12, the customer nets 2.63, which is multipled by 100 to yield a $263 gain per contract (x10) = $2630 total gain. |
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A gain on the sale of a long equity put option is:
A) ordinary income. B) always a LT capital gain. C) a short or LT capital gain. D) always a ST capital gain. |
Answer: D
Any trading in options produces only ST gains or losses; therefore any gain on the sale of a long put option must always be a ST capital gain (If a question wishes you to consider LEAPS, the question will refer to them). |
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On a single day, a customer purchases 15 TPL Sep 50 puts at 6 and 15 TPL Sep 50 calls at 1. If the price of TPL is $45/sh and the customer has no other positions, what is this position called?
A) Covered B) Straddle C) Combination D) Spread |
Answer: B
A long straddle is the purchase of a call and a put on the same stock with the same strike price and expiration. |
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Your client expects KLM Corp stock to undergo a slight but LT decrease in price. He is willing and able to take a risk to generate a small amount of income. Which of the following might be an effective strategy?
A) Sell KLM LEAPS Calls B) Sell KLM LEAPS Puts C) Buy near-term, in the money KLM puts D) Buy near-term, in the money KLM calls |
Answer: A
Your customer wants to generate income, which means he must sell something, not buy it. Since he is in a position to take a risk, and expects KLM's stock price to decline LT, selling LEAPS calls would be a possible strategy (Selling calls = obligation to sell). |
