Question 1

A straddle is a combination of a put and call on:

Accepted Answer

A straddle is a combination of a put and call on the same stock with the same strike price and expiration date. It is used to play wide fluctuations in stock prices and is usually applied to individual stocks with high betas and a history of large, short-term fluctuations in price.

Question 2

Block Corp. 40 call option is selling for $6, and the common stock is selling for $41. The intrinsic value is:

Accepted Answer

The intrinsic value of a call option is the current stock price minus the strike price, if the stock price is above the strike price. Here, it's $41 - $40 = $1. The speculative premium is the option price minus the intrinsic value, which is $6 - $1 = $5.

Question 3

The difference between a put and a call option is that:

Accepted Answer

The most widely known options are puts and calls on common stock. A put is an option to sell 100 shares of common stock at a specified price for a given period. Calls are the opposite of puts and allow the owner the right to buy 100 shares of common stock from the option seller (writer).

Question 4

A stock is selling for $45.75, with a put option available at a $50 strike that has a premium of $7.50. What is the intrinsic value of the put?

Accepted Answer

The intrinsic value of a put option is equal to the strike price minus the current stock price.

In this case, the strike price of the put option is $50 and the current stock price is $45.75.

So the intrinsic value of the put option is:

$50 - $45.75 = $4.25

Therefore, the correct answer is (A).

Question 5

An Arthur Corp. 25 put option is selling for $3 when the stock is trading at $22.

Accepted Answer

Intrinsic Value = Strike - Market = $25 - $22 = $3Speculative Premium = Option Price - Intrinsic Value = $3 - $3 = 0The time to expiration must be very close.

Question 6

A stock is selling for $45.75, with a call option available at a $40 strike that has a premium of $7.50. What is the speculative premium of the call?

Accepted Answer

The answer of A stock is selling for $45.75, with...

Question 7

An investor striving for maximum leverage will generally buy options that are:

Accepted Answer

An investor striving for maximum leverage generally buys options that are out-of-the-money, or slightly in-the-money.

Question 8

Tom Smith purchases 100 shares of DOUBLE Systems stock for $63 per share and wishes to hedge his position by writing a 100 share call option on his holdings. The option has a $65 strike price and a premium of $8.75. If the stock is selling at $64 at the time of expiration, what will be the overall dollar gain or loss on this covered option play? (Consider the change in stock value as well as the gain or loss on the option.)

Accepted Answer

The gain on the call option would be 100 X $8.75 = $875, and the appreciation on the long position = 100 X $1 = $100.

Question 9

Under what circumstances can the writer of a call option expect to profit?

Accepted Answer

The circumstances are: the stock price declines, the stock price remains the same, and the increase in stock price is less than the speculative premium.

Question 10

A stock is selling for $45.75, with a call option available at a $40 strike that has a premium of $7.50. What is the intrinsic value of the call?

Accepted Answer

The intrinsic value of a call option is calculated by subtracting the strike price from the current stock price, if the stock price is above the strike price. Here, it's $45.75 - $40 = $5.75.

Question 11

A stock is selling for $45.75 with a put option available at a $50 strike that has a premium of $7.50. What is the speculative premium of the put?

Accepted Answer

The speculative premium of a put option is the difference between the option premium and the intrinsic value of the option.

In this case, the intrinsic value of the put option is the difference between the strike price ($50) and the current stock price ($45.75), which is $4.25.

Therefore, the speculative premium of the put option is the option premium ($7.50) minus the intrinsic value of the option ($4.25), which is $3.25.

So the correct answer is C) $3.25.

Question 12

IBM was trading at $100 when Mrs. Peterson bought a 100 call on IBM at a price of $10. Three months later, IBM common stock was trading at $130, and the call option was trading at $33. The leverage factor for this situation would be:

Accepted Answer

Option gain = $33/$10 = 3.3 = 330%Leverage = 330%/30% = 11x

Question 13

All of the following are characteristics of LEAPS except:

Accepted Answer

LEAPS generally have higher premiums because of their length.

Question 14

A stock is selling for $45.75 with a call option available at a $40 strike that has a premium of $7.50. What percentage of the common stock price does the speculative premium represent?

Accepted Answer

The answer of A stock is selling for $45.75 with...

Question 15

Unlike a covered call writer, a naked call writer will always lose if:

Accepted Answer

Writers of call options take the opposite side of the market from buyers. The writer is similar to a short seller in that he or she expects the stock to decline or stay the same. For short sellers to profit, prices must decline, but because writers of call options receive a premium, they can make a profit if prices stay the same or even rise less than the speculative premium.

Question 16

In general, the speculative premiums (in percent) are higher for:

Accepted Answer

In general, the speculative premiums (in percent) are higher for high-beta, low-dividend yield stocks.

Question 17

Assume that a stock is selling for $47 with options available at 20, 30, and 40 strike prices. The 40 call option is at 7 1/2. Calculate the following:
(a) The intrinsic value of the $40 call
(b) Is the call in-the-money?
(c) The speculative premium on the 40 call option
(d) The percent the speculative premium represents of the common stock price

Accepted Answer

The answer of Assume that a stock is selling for...

Question 18

Calculate the leverage from holding a call option with a closing price of $3 on February 18 and a closing price of $6.5 on April 6. The stock price on February 18 was $22 and closed at $27 on April 6.

Accepted Answer

The answer of Calculate the leverage from holding a call...

Question 19

An investor who wishes to take advantage of a current stock price, but does not expect to have cash available until a specific date in the future, would probably use the _________ strategy to invest in options.

Accepted Answer

Often, an investor thinks a stock will rise over the long term but does not have cash currently available to purchase the stock. The important point for this strategy is that the investor wants to own this stock eventually but does not want to miss out on a good buying opportunity (based on expectations).

Question 20

Assume you purchase 200 shares of stock at $80 per share and wish to hedge part of your position by writing a 100 share option. The option has a strike price of $75 and a premium of $6. If at the time of expiration, the stock is selling at the following prices ($75, $80, $90) what will be your overall gain or loss?

Accepted Answer

The answer of Assume you purchase 200 shares of stock...

Quiz 14: Put and Call Options