Question 1

If an option has no intrinsic value, it is "out of the money."​

Accepted Answer

This statement is true. An option is considered "out of the money" if its current market price is lower than the price at which it would give the option holder a profit if they were to exercise it. This means that the option has no intrinsic value and is only valuable based on the possibility of its price increasing in the future.

Question 2

The value of a stock index put option will rise if the market as a whole declines.​

Accepted Answer

A put option gives the holder the right to sell a stock index at a predetermined price (strike price). As the market declines, the value of the index decreases, and the put option becomes more valuable because it allows the holder to sell the index at a higher price than the current market value. Therefore, the value of a stock index put option rises when the market declines.

Question 3

The primary reason for purchasing an option is the income it generates.​

Accepted Answer

The primary reason for purchasing an option is to speculate on the price movement of the underlying asset. While options can generate income through selling options or collecting premiums, this is not the primary reason for their purchase.

Question 4

Put and call options are bought and sold (i.e., are traded) in secondary markets.​

Accepted Answer

Put and call options can be bought and sold in secondary markets such as options exchanges. This allows investors to trade these contracts before they expire and potentially realize a profit or reduce their losses.

Question 5

An out of the money option will expire at the expiration date.​

Accepted Answer

An out of the money option will expire worthless if it is not exercised before the expiration date.

Question 6

The value of a stock index put option rises as security prices rise.​

Accepted Answer

The value of a stock index put option decreases as security prices rise. This is because a put option gives the holder the right to sell the underlying asset (in this case, the stock index) at a fixed price (the strike price). If the stock index price rises above the strike price, the put option becomes less valuable because the holder would not want to sell at a lower price than what the market is currently offering.

Question 7

One advantage offered by options is the potential to increase your return on an investment.​

Accepted Answer

Options provide the opportunity for investors to leverage their capital and potentially increase their returns compared to simply investing in the underlying asset. This is because options allow investors to control a larger amount of the underlying asset with a smaller amount of capital, and also offer the potential for profits regardless of whether the market is bullish or bearish. However, it is important to note that options trading also involves a higher level of risk and requires a thorough understanding of the underlying asset and the options market.

Question 8

If the price of a stock is less than the strike price, a call has no intrinsic value (that is, out of the money).​

Accepted Answer

This is because a call option gives the holder the right to buy the underlying stock at the strike price, so it only has intrinsic value if the stock price is higher than the strike price.

Question 9

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

Accepted Answer

The intrinsic value of a put option is the strike price minus the stock price, not the other way around.

Question 10

If an individual owns a portfolio of common stocks and wants to hedge the portfolio, that investor may sell a stock index call option.​

Accepted Answer

Selling a stock index call option allows the investor to receive a premium and earn a profit if the market stays neutral or decreases, thus providing a hedge against potential losses in their stock portfolio.

Question 11

An option's price tends to exceed the option's intrinsic value.​

Accepted Answer

This is true because an option also includes time value, volatility, and other factors that affect its price beyond just the current value of the underlying asset.

Question 12

Purchasing a put is similar to selling a stock short. Both positions anticipate that the price of the stock will fall.​

Accepted Answer

Both purchasing a put and selling a stock short are bearish strategies that anticipate the price of the stock to decline. When you purchase a put, you have the right to sell the stock at a specific price, which means you profit if the stock price falls. When you sell a stock short, you borrow the shares and sell them, expecting to buy them back at a lower price and profit from the difference. While they have some differences, both strategies aim to profit from a decrease in the stock price.

Question 13

At expiration an option will sell for its intrinsic value.​

Accepted Answer

At expiration, an option will sell for its intrinsic value, which is the difference between the strike price and the underlying asset's market price. If the option has no intrinsic value, it will expire worthless.

Question 14

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

Accepted Answer

A call is an option to buy stock at a specified price within a specified time period, not sell stock.

Question 15

Writers of call options anticipate earning the time premium the call demands.​

Accepted Answer

Writers of call options collect a premium from the buyer in exchange for the right to purchase the underlying security at the strike price. This premium includes a time premium, which compensates the writer for the risk they are taking by selling the call option. Therefore, they anticipate earning the time premium.

Question 16

The time premium tends to reduce the potential leverage an option offers.​

Accepted Answer

The time premium is the portion of an option's price that is based on the time left until its expiration. As the expiration date approaches, the time premium becomes smaller, reducing the overall premium and limiting the potential leverage an option can provide. Therefore, option leverage tends to become less enticing as an option approaches expiration.

Question 17

A put option is the right to sell stock at a specified price within a specified time period.​

Accepted Answer

A put option gives the holder the right, but not the obligation, to sell a specific amount of an underlying asset, such as stock, at a predetermined price within a set time period.

Question 18

Over time the time premium paid for an option tends to rise.​

Accepted Answer

Over time, the time premium of an option tends to decrease as the expiration date approaches, all other factors being equal. This is due to the diminishing amount of time left for the option to move in-the-money.

Question 19

An option's time premium rises as the option approaches expiration.​

Accepted Answer

The time premium of an option decreases as the option approaches expiration. This is because the option has less time to potentially move in the desired direction, reducing the likelihood of the option becoming profitable by expiration.

Question 20

The intrinsic value of a call option rises as the price of the underlying stock falls.​

Accepted Answer

The intrinsic value of a call option is calculated as the difference between the current stock price and the strike price of the option. Therefore, if the stock price falls, the intrinsic value of the call option will also decrease.

Quiz 28: Options: Puts and Calls

If an option has no intrinsic value, it is "out of the money."​

The value of a stock index put option will rise if the market as a whole declines.​

The primary reason for purchasing an option is the income it generates.​

Put and call options are bought and sold (i.e., are traded) in secondary markets.​

An out of the money option will expire at the expiration date.​

The value of a stock index put option rises as security prices rise.​

One advantage offered by options is the potential to increase your return on an investment.​

If the price of a stock is less than the strike price, a call has no intrinsic value (that is, out of the money).​

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

If an individual owns a portfolio of common stocks and wants to hedge the portfolio, that investor may sell a stock index call option.​

An option's price tends to exceed the option's intrinsic value.​

Purchasing a put is similar to selling a stock short. Both positions anticipate that the price of the stock will fall.​

At expiration an option will sell for its intrinsic value.​

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

Writers of call options anticipate earning the time premium the call demands.​

The time premium tends to reduce the potential leverage an option offers.​

A put option is the right to sell stock at a specified price within a specified time period.​

Over time the time premium paid for an option tends to rise.​

An option's time premium rises as the option approaches expiration.​

The intrinsic value of a call option rises as the price of the underlying stock falls.​

If an option has no intrinsic value, it is "out of the money."

The value of a stock index put option will rise if the market as a whole declines.

The primary reason for purchasing an option is the income it generates.

Put and call options are bought and sold (i.e., are traded) in secondary markets.

An out of the money option will expire at the expiration date.

The value of a stock index put option rises as security prices rise.

One advantage offered by options is the potential to increase your return on an investment.

If the price of a stock is less than the strike price, a call has no intrinsic value (that is, out of the money).

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

If an individual owns a portfolio of common stocks and wants to hedge the portfolio, that investor may sell a stock index call option.

An option's price tends to exceed the option's intrinsic value.

Purchasing a put is similar to selling a stock short. Both positions anticipate that the price of the stock will fall.

At expiration an option will sell for its intrinsic value.

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

Writers of call options anticipate earning the time premium the call demands.

The time premium tends to reduce the potential leverage an option offers.

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

Over time the time premium paid for an option tends to rise.

An option's time premium rises as the option approaches expiration.

The intrinsic value of a call option rises as the price of the underlying stock falls.