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Ch.3 Options

Terms in this set (28)

A customer sells 1 WL September 100 call for 10 and buys 100 shares of WL stock at 105.

If the customer is assigned an exercise notice when the price of the stock is 110, the profit or loss per share would be?

[A]$5 loss[B]$5 profit[C]$10 loss[D]$10 profit
B
A customer buys one ABC Sept 50 put for $2.50 when the price of ABC stock is 60. What is the MAXIMUM profit that the customer may realize?
[A]$250[B]$4,750[C]$5,000[D]Unlimited
D

The customer can sell ABC at $50 and if the stock goes down to zero, he will have a profit of $5,000 ($50 x 100 shares). But, he had to pay $250 for the put ($2.50 x 100 shares = 1 contract). Therefore, his maximum net profit is $4,750.
With no other positions in her account, a customer buys 100 shares of XYZ at $45/share and simultaneously buys 1 XYZ Jan 45 put for a premium of 3. The customer will breakeven if, at the expiration, the market price of XYZ is:
[A]$48[B]$45[C]$42[D]$40
a
Which of the following are true of the seller of a put option?
I. The maximum loss is limited.
II. The maximum gain is unlimited.
III. The maximum loss is limited to the premium.
IV. The maximum gain is limited to the premium.

[A]I and II[B]III and IV[C]II and III[D]I and IV
D

Choice IV is correct because the most you can make from the sale of the option -- limited profit. Choice I is correct. Because the strike price is fixed, you would know at what price you would be required to acquire the index -- limited loss.
Which of the following is INCORRECT concerning customer background and financial information, according to options exchange rules?

[A]Customers interested in trading options must submit written attestation of their options trading experience before their account can be approved.

[B]Financial information which the customer supplies must be sent for verification by the broker-dealer within 15 days after the account has been approved for options transactions.

[C]If the firm becomes aware of material changes concerning existing customers, a copy of background and financial information on file must be sent to the customer within 15 days after the firm becomes aware of the change.

[D]This information must be sent to the customer by the firm for verification within 15 days after the account is approved for options transactions unless it is contained in the customer's account agreement.
A
If a client of yours places an order to buy 100 shares of BCD at a market price of $41 per share and also places an order to sell 1 BCD June 35 call for 7, at what market price will the customer break even?
[A]The customer will break even at a market price of $48 per share.[B]The customer will break even at a market price of $42 per share.[C]The customer will break even at a market price of $34 per share.[D]The customer will break even at a market price of $28 per share.
C

The customer buys at $41 and sells a call with a premium of 7. B 4,100 - S 700 + Therefore the customer will breakeven at a market price of $34 per share.
An investor is considered "covered" in which of the following scenarios involving option contracts? The investor:
[A]sells 1 ABC Call on common stock and owns 100 shares of ABC non-convertible preferred stock.
[B]buys 100 shares of ABC common stock and buys 1 ABC Put.
[C]buys 100 shares of ABC common stock and sells 1 ABC Call.[D]sells 1 ABC Put and buys 100 shares of ABC common stock.
C
Which of the following is true when the holder of put decides to exercise the put and the broker-dealer sends the exercise notice to the OCC Options Clearing Corporation? The OCC would

[A]forward the exercise notice on a first in first out basis to another clearing member who has a short position that satisfies the exercise notice.
[B]randomly choose another clearing member who is short that series to satisfy the exercise notice
[C]assign the exercise notice to the clearing member who wrote the option
[D]pay the money required to satisfy the exercise price directly to the person who exercised the option
B
A customer is long a listed equity option contract and decides to exercise. Which of the following statements is TRUE?
[A]The seller of the contract in the original transaction will receive an exercise notice directly from the buyer of the contract.
[B]The buyer of the contract will notify their broker-dealer which will directly assign the exercise to a seller of the same option at the firm.[C]The buyer of the contract will directly notify the Options Clearing Corporation (OCC), which will then assign and directly notify a seller of that same option.
[D]The buyer of the contract will notify their broker-dealer which will then notify the OCC, which then assigns the exercise to a broker-dealer that is responsible for assigning the exercise to a seller of the same option.
D
Mr. Jones is long 100 shares of XYZ stock. Which option transactions would give him the MOST downside protection?
[A]He should sell one XYZ call and sell one XYZ put.
[B]He should sell one XYZ call and buy one XYZ put.
[C]He should buy one XYZ call and sell one XYZ put.
[D]He should buy one XYZ call and buy one XYZ put.
B
Under the OCC's option position limit rules, which of the following positions would be combined in order to determine if a customers position is within the specified limits for options on a specific underlying security?
Long puts and long calls.
Short puts and long calls.
Long puts and short calls.
Short puts and short calls.

[A]I and II[B]I and IV[C]II and III[D]III and IV
C

Position limit rules regulate option positions on the same side of the market. Short puts and long calls are both bullish positions, while long puts and short calls are both bearish positions, on the same side of the market.
An investor would have the greatest amount of risk with which of the following option positions?
[A]The investor writes an uncovered put.
[B]The investor buys a long put.
[C]The investor writes an uncovered call.
[D]The investor buys a long call.
C
The writing of an uncovered call has unlimited loss potential, therefore it would have the greatest risk.
You are an RR at a firm and one of your customers calls you up and informs you that she wishes to exercise a long listed option that she currently holds. To whom would your firm present such an exercise order?
[A]Your firm would present the order to the OCC (Options Clearing Corporation).
[B]Your firm would present the order to a holder of the short option in the same underlying security to be selected on a random basis.[C]Your firm would present the order to the investor who wrote the option contract.
[D]Your firm would present the order to any broker-dealer not associated with your firm.
A

The OCC is the issuer and guarantor of all listed options. The exercise would be presented to the OCC and the OCC would then randomly choose a broker-dealer to whom the exercise notice would be assigned.
One of your clients has large holdings of a few blue-chip corporations. The investor wishes to hold onto the stock for multiple reasons, but she is uncertain about price fluctuations in the short-term future. How can she use options to provide the MOST downside protection?
[A]She can purchase call options on the securities in her portfolio.[B]She can sell call options on the securities in her portfolio.
[C]She can purchase put options on the securities in her portfolio.[D]She can sell put options on the securities in her portfolio.
C
All of the following are advantages to call buyers EXCEPT:
[A]Leverage[B]Hedging[C]Limiting Risk[D]Premium
D
A customer in January buys 200 shares of XYZ at $50 per share and also buys 2 XYZ May 50 puts for $300 each. Four months later, the puts expire and the stock is sold at $60 per share. The short-term capital gain is?
[A]$600[B]$1,400[C]$2,000[D]$2,600
B
A client sells one XYZ Nov 80 call for 6 and buys one XYZ Nov 60 call for 15 when the price of XYZ is 68.
If both expire unexercised, the profit or loss is:

[A]$600 profit.[B]$900 loss.[C]$1,500 loss.[D]$2,100 profit.
B
An investor elects to exercise their option contract and ends up buying 100 shares of a common stock at the exercise price listed on the contract. This is the result of the investor exercising a:
[A]Long Call[B]Short Call[C]Long Put[D]Short Put
A
Which of the following is responsible for the issuing of exchange traded option contracts?
[A]Options Clearing Corporation[B]Member Firm[C]Securities and Exchange Commission[D]Chicago Board Options Exchange
A
A writer of a June 220 index put is assigned with the index at 215. The writer will be required to:
[A]Deliver cash[B]Receive cash[C]Deliver securities[D]Receive Securities
A
A "series" of options is:
[A]All option contracts of the same type.[B]All option contracts of the same type covering the same underlying stock.[C]All option contracts of the same class having the same expiration date and unit of trading.[D]All option contracts of the same class having the same expiration date, exercise price, and unit of trading.
D
A client sells one XYZ Nov 80 call for 6 and buys one XYZ Nov 60 call for 15 when the price of XYZ is 68. If the client sells the XYZ Nov 60 call for 24 and the XYZ Nov 80 call expires unexercised, the profit or loss would be?

[A]$600 loss.[B]$900 loss.[C]$900 profit.[D]$1,500 profit.
D
The holder of a stock index option upon exercise receives:
[A]The out of the money amount x $100.[B]The in the money amount x $100.[C]Securities in the index equal to the aggregate exercise price of the option.[D]The premium paid plus the out of the money amount x $100.
B
One of your clients is a corporate account. The corporation regularly sells its products to manufacturers overseas. Recently the company received an order from a British company. The terms of the contract specify that the British firm must pay in British Pounds no later than 45 days following delivery. The corporate account has used options in the past to hedge against currency fluctuations when accepting delivery in a foreign currency. Which of the following would be the BEST domestic options strategy to take on British Pounds given this scenario?
[A]The corporation should buy calls on the British Pound.
[B]The corporation should sell calls on the British Pound.
[C]The corporation should buy puts on the British Pound.
[D]The corporation should sell puts on the British Pound.
C
An investor or firm who has entered into a contract where they will be paid in a foreign currency would be worried about a decline in that foreign currency against the dollar. They would buy puts on the foreign currency to provide protection against a decline in that currency against the dollar. Always remember that domestically, options cannot be traded on the U.S. Dollar.
XYZ stock has opened at 70 and has begun to rise sharply during trading. Which of the following XYZ option contracts would show the greatest increase in value?
[A]XYZ July 70 call.[B]XYZ July 80 call.[C]XYZ July 70 put.[D]XYZ July 80 put.
A
A customer will buy a call when he expects the market to rise. In this case, the premium for the call with a strike price of 70 will move dollar for dollar with the market price of the underlying stock. The July 80 call is not yet in-the-money, so the investor cannot choose to exercise the option.
At expiration, if the market price of the underlying stock is the same as the strike price of the option, which of the following positions would result in a profit?
Long call
Short call
Short call/short put
Long call/long put

[A]I and III[B]II and IV[C]I and IV[D]II and III
D
A customer would have an unlimited dollar risk if he was:
[A]Short 1 WL Jan 50 put[B]Long 1 WL Jan 50 put[C]Short 1 WL Jan 50 put and short 100 shares of WL stock[D]Short 1 WL Jan 50 put and long 100 shares of WL stock
C

Short stock positions have unlimited upside risk. Being Short a put only gives the investor limited upside protection.
A customer performs the following transactions when DEF is trading at $54.50 per share:- Purchases 1 DEF July 55 call for 4- Purchases 1 DEF July 60 put for 6The market price of DEF then moves to $52.50 per share. At this point in time, the customer sells the put option for the in-the-money amount. The call remains outstanding until it expires. What is this customer's profit or loss in this scenario?
[A]The customer will have a gain of $250.
[B]The customer will have a loss of $250.
[C]The customer will have a gain of $800.
[D]The customer will have a loss of $800.
B

The customer spends a total of $1,000 in buying the two option contracts (long combination with $400 out of pocket for the call and $600 out of pocket for the put). The customer then closes the put for the "in the money" amount. The strike price is 60, and the market is currently $52.50, so the in-the-money amount is $7.50 per share, or $750. If the call expires, then we have $1,000 out of pocket and $750 into pocket, leaving us with $250 in losses.
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