Deck 19: An Introduction to Options

Question 1

Since options offer potential leverage,they tend to sell for a time premium.

Answer 1

True

Question 2

Because of arbitrage,an option should not sell for less than its intrinsic value.

Answer 2

True

Question 3

The maximum potential profit on a covered call is the time premium paid for the stock.

Answer 3

False

Question 4

Because of the small cash outlay to buy an option,these securities are considered to be conservative investments.

Question 5

Calls are options to sell stock at a specified price within a specified time period.

Question 6

If the price of an option to buy stock were to sell for less than its strike price,an opportunity for arbitrage exists.

Question 7

A covered call is constructed by buying the stock and selling the call.

Question 8

Arbitrage determines the maximum price of an option.

Question 9

The intrinsic value of an option to buy stock (i.e.,a call option)is the difference between the price of the stock and the per share exercise price of the option.

Question 10

Call options are usually for less than a year.

Question 11

Most investors rarely have an opportunity to establish an arbitrage position.

Question 12

As the price of a stock rises,the time premium paid for an option to buy stock increases.

Question 13

The strike price of an option is fixed.

Question 14

An option's intrinsic value exceeds the option's price.

Question 15

Holders of calls do not receive the cash dividends paid to the company's stockholders.

Question 16

The price of an option is generally less than the option's intrinsic value.

Question 17

A warrant is an option issued by a corporation to buy its stock at a specified price within a specified time period.

Question 18

Arbitrage is the act of simultaneously buying and selling in two markets to take advantage of price differentials.

Question 19

Call options,unlike warrants,may be written by individuals.

Question 20

The time premium paid for an option tends to reduce the option's potential leverage.

Question 21

There is no limit to the potential loss from buying a call option.

Question 22

The intrinsic value of a put establishes the put's maximum price.

Question 23

While individuals can write call options,they can only buy put options.

Question 24

The owner of a call option does not receive any dividends paid by the firm.

Question 25

A put is an option to sell stock at a specified price within a specified time period.

Question 26

The profits on options are exempt from federal income taxation.

Question 27

The value of a put is inversely related to the value of the underlying stock.

Question 28

The buyer of a call option wants the price of the stock to rise.

Question 29

The intrinsic value of a put is the price of the stock minus the put's strike price.

Question 30

Writing covered call options is more risky than writing naked call options.

Question 31

The intrinsic value of a call option is the strike price minus the stock's price.

Question 32

The CBOE is a secondary market for put and call options.

Question 33

When a call option is exercised,new stock is issued.

Question 34

Calls tend to sell for a time premium that exceeds the stock's price.

Question 35

The price of a call option is often more volatile than the price of the underlying stock.

Question 36

Selling a covered call option is comparable to selling a stock short.

Question 37

An investor may reduce risk by simultaneously purchasing a stock and a put option.

Question 38

If the price of a stock rises,the writer of a put option profits.

Question 39

A writer of a naked call option will lose money if the price of the stock declines.

Question 40

The writer of a covered call cannot lose money if the price of the stock rises.

Question 41

In-the-money stock index options are not exercised.

Question 42

The most the individual who buys a put option can lose is the cost of the option.

Question 43

Options sell for a time premium over their intrinsic value because

A) they earn dividends
B) they are debt obligations
C) they offer potential leverage
D) they are long-term investments

Question 44

Options to buy stock offer

A) potential leverage
B) potential income
C) safety of principal
D) liquidity

Question 45

If the investor buys a stock index put,the individual will profit if the market rises.

Question 46

Buying a stock index option reduces systematic risk.

Question 47

Stock index options permit investors to establish a position in the market without having to select individual stocks.

Question 48

A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock index call option.

Question 49

If an investor is bearish,he or she should not buy a stock index call option.

Question 50

If a stockholder exercises a right,that investor maintains his or her proportionate ownership in the corporation.

Question 51

The intrinsic value of an option to buy stock rises as

A) the strike price increases and the price of the stock declines
B) the strike price increases and the price of the stock rises
C) the strike price decreases and the price of the stock declines
D) the strike price decreases and the price of the stock rises

Question 52

Because of arbitrage,the price of an option

A) exceeds its intrinsic value
B) is less than its intrinsic value
C) cannot be less than its intrinsic value
D) cannot be greater than its intrinsic value

Question 53

The intrinsic value of an option to buy stock is

A) its price
B) its strike price
C) the difference between the stock's price and the option's strike price
D) the difference between the option's strike price and the option's price

Question 54

The intrinsic value of an option sets

A) the minimum price of an option
B) the maximum price of an option
C) neither an option's minimum nor its maximum price
D) both the maximum and the minimum price of an option

Question 55

The most the investor who sells a naked stock index option can lose is the cost of the option.

Question 56

Corporations use rights offerings to sell new stock to current stockholders.

Question 57

If an investor anticipated that interest rates would rise,that individual should sell an option to buy Treasury bonds.

Question 58

In addition to put and call options on individual stocks,there are also options on the market as a whole.

Question 59

There is no secondary market for rights.

Question 60

The value of a right is independent of the price of the stock that the right is an option to buy.

Question 61

The time premium paid for an option to buy stock is affected by

A) the length of time to expiration
B) the firm's credit rating
C) the existence of a rights offering
D) the firm's financial statements

Question 62

Warrants are issued by

A) individuals
B) firms
C) governments
D) investors

Question 63

One reason for writing and selling a covered call option is

A) potential leverage
B) safety of principal
C) income received
D) liquidity

Question 64

If the price of a stock rises substantially,the investor who wrote a covered call
1)earns a modest profit
2)sustains a modest loss
3)lost an opportunity for a large profit

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) only 3

Question 65

Which of the following is premised on lower stock prices?

A) buying a stock index call
B) buying a stock index put
C) buying a stock and selling a call
D) buying a stock and selling a put

Question 66

A call is an option to

A) sell stock at a specified price
B) buy stock at a specified price
C) deliver stock at a specified price
D) deliver bonds at a specified price

Question 67

Call options offer buyers

A) potential leverage
B) liquidity
C) income
D) safety of principal

Question 68

The price of a call depends on the 1.strike price
2)price of the underlying stock
3)term (i.e.,life)of the call

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 69

The value of a put rises as the price of

A) stock rises
B) a call falls
C) stock falls
D) a call rises

Question 70

Stock index options
1)permit the investor to short the market instead of individual stocks
2)require delivery of an index of stocks
3)limit the buyer's potential loss to the cost of the option

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 71

Warrants and calls do not have

A) an expiration date
B) a specified exercise price
C) the right to receive dividends
D) a strike price

Question 72

The writer of a naked call option wants

A) the prices of the stock and the call to rise
B) the prices of the stock and the call to fall
C) the prices of the stock to fall and the call to rise
D) the prices of the stock to rise and the call to remain stable

Question 73

A writer of a call option closes the position by

A) purchasing the stock
B) selling the stock
C) purchasing the option
D) selling the option

Question 74

A put is an option to

A) buy stock
B) receive stock
C) sell stock
D) receive dividends

Question 75

Which of the following assumes higher stock prices? 1.buying a stock index call
2)buying a stock index put
3)selling a stock index call
4)selling a stock index put

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 76

If an investor constructs a covered call,

A) there is no limit to the potential profit
B) risk is increased
C) risk is reduced
D) the term of the position is increased

Question 77

A put and a call have the following terms:
The price of the stock is currently $55.The price of the call and put are,respectively,$9 and $1.What will be the profit from buying the call or buying the put if,after six months,the price of the stock is $40,$50,or $60?

Question 78

The CBOE is 1.a secondary market in put and call options
2)a division of the SEC that regulates option trading
3)the first organized options exchange

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 79

A call option is similar to a warrant except

A) the strike price is fixed
B) it may be issued by individual investors
C) it is not marketable (saleable)
D) it receives dividend payments

Question 80

The intrinsic value of a put depends on the
1)strike price
2)price of the stock
3)term on the put

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices