Question 1

Which of the following describes a long position in an option?

Accepted Answer

A long position is a position where an option has been purchased.It can be contrasted with a short position which is a position where an option has been sold.

Question 2

An investor has exchange-traded put options to sell 100 shares for $20.There is a $1 cash dividend.Which of the following is then the position of the investor?

Accepted Answer

Cash dividends unless they are unusually large have no effect on the terms of an option.

Question 3

In which of the following cases is an asset NOT considered constructively sold?

Accepted Answer

Profits on the asset have to be recognized in A,C,and D.The holder of the asset cannot defer recognition of profits with the trades indicated.In the case of B the asset is not considered constructively sold.Buying a deep-in-the-money put option is a way of almost certainly locking in a profit on an asset without triggering an immediate tax liability.

Question 4

Which of the following describes a call option?

Accepted Answer

A call option is the right,but not the obligation to buy.

Question 5

The price of a stock is $67.A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4.The options are exercised when the stock price is $69.What is the trader's net profit or loss?

Accepted Answer

The option payoff is 70−69 = $1.The amount received for the option is $4.The gain is $3 per option.In total 5×100 = 500 options are sold.The total gain is therefore $3 × 500 = $1,500.

Question 6

Which of the following is an example of an option class?

Accepted Answer

An option class is all calls on a certain stock or all puts on a certain stock.

Question 7

Which of the following is true?

Accepted Answer

None of the statements are true.Long calls,short calls,long puts,and short puts all have different payoffs as indicated by Figure 10.5.A put on a stock plus the stock provides a payoff that is similar to a call,as explained in Chapters 11 and 12.But a call on a stock plus a stock does not provide a similar payoff to a put.

Question 8

Consider a put option and a call option with the same strike price and time to maturity.Which of the following is true?

Accepted Answer

If the stock price is greater than the strike price the call is in the money and the put is out of the money.If the stock price is less than the strike price the call is out of the money and the put is in the money.If the stock price is equal to the strike price both options are at the money.

Question 9

Which of the following is NOT traded by the CBOE?

Accepted Answer

Monthlys are not a CBOE product.The others are.

Question 10

An investor has exchange-traded put options to sell 100 shares for $20.There is a 2 for 1 stock split.Which of the following is the position of the investor after the stock split?

Accepted Answer

When there is a stock split the number of shares increases and the strike price decreases.In this case,because it is a 2 for 1 stock split,the number of shares doubles and the strike price halves.

Question 11

Which of the following is an example of an option series?

Accepted Answer

All options on a certain stock of a certain type (calls or put)with a certain strike price and time to maturity are referred to as an option series.

Question 12

Which of the following must post margin?

Accepted Answer

The seller of the option must post margin as a guarantee that the payoff on the option (if there is one)will be made.The buyer of the option usually pays for the option upfront and so no margin is required.

Question 13

Which of the following describes a difference between a warrant and an exchange-traded stock option?

Accepted Answer

A warrant is a fixed number of options issued by a company.They often trade on an exchange after they have been issued.

Question 14

When a six-month option is purchased

Accepted Answer

Only options lasting more than 9 months can be bought on margin.

Question 15

An investor has exchange-traded put options to sell 100 shares for $20.There is 25% stock dividend.Which of the following is the position of the investor after the stock dividend?

Accepted Answer

The stock dividend is equivalent to a 5 for 4 stock split.The number of shares goes up by 25% and the strike price is reduced to 4/5 of its previous value.

Question 16

Which of the following describes a short position in an option?

Accepted Answer

A short position is a position where the option has been sold (the opposite to a long position).

Question 17

Which of the following describes LEAPS?

Accepted Answer

LEAPS are long-term equity anticipation securities.They are exchange-traded options with relatively long maturities.

Question 18

The price of a stock is $64.A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $10.When does the trader make a profit?

Accepted Answer

The payoff must be more than the $10 paid for the option.The stock price must therefore be below $50.

Question 19

Which of the following are true for CBOE stock options?

Accepted Answer

Margin accounts for options must be brought up to the initial/maintenance margin level every day.

Question 20

A trader buys a call and sells a put with the same strike price and maturity date.What is the position equivalent to?

Accepted Answer

From adding up the two payoffs we see that A is true: max(S_T−K,0)−max(K−S_T,0)= S_T−K

Quiz 10: Mechanics of Options Markets