CHAPTER 5: Options
MULTIPLE CHOICE
1. The seller (or the writer) of a call option:
a. has the right to buy the underlying asset at a strike price until an expiration date
b. has the right to sell the underlying asset at a strike price until an expiration date
c. may have the obligation to buy the underlying asset at a strike price until an expiration
date
d. may have the obligation to sell the underlying asset at a strike price until an expiration
date
e. None of these answers are correct.
ANS: D
MSC: Factual
DIF: Easy
REF: 5.2
TOP: Options
2. The seller (or the writer) of a put option:
a. has the right to buy the underlying asset at a strike price until an expiration date
b. has the right to sell the underlying asset at a strike price until an expiration date
c. may have the obligation to buy the underlying asset at a strike price until an expiration
date
d. may have the obligation to sell the underlying asset at a strike price until an expiration
date
e. None of these answers are correct.
ANS: C
MSC: Factual
DIF: Easy
REF: 5.2
TOP: Options
3. The distinction between American and European options is that:
a. American options trade in the United States, while European options trade in Europe
b. American options can be exercised at any time until expiration, while European options
can only be exercised at the time of expiration
c. American options have a capped payoff, while European options traders can have
unlimited profits or losses
d. American options end in physical delivery of the underlying asset, while European options
end in cash settlement
e. None of these answers are correct.
ANS: B
MSC: Factual
DIF: Easy
REF: 5.2
TOP: Options
4. When the stock price is greater than the strike price, a call is:
a. in-the-money
b. at-the-money
c. out-of-the money
d. intrinsically at risk
e. None of these answers are correct.
ANS: A
MSC: Factual
DIF: Easy
REF: 5.3
TOP: Call Options
5. Compute the net profit or loss on the maturity date for a December 45 call for which the buyer paid a
premium of $3.75 and the spot price at maturity is $49.25.
a. –$1
b.
c.
d.
e.
–$0.50
$0.50
$1
None of these answers are correct.
ANS: C
MSC: Applied
DIF: Easy
REF: 5.3
TOP: Call Options
6. When the stock price is greater than the strike price, a put is:
a. in-the-money
b. at-the-money
c. out-of-the money
d. intrinsically at risk
e. None of these answers are correct.
ANS: C
MSC: Factual
DIF: Easy
REF: 5.4
TOP: Put Options
7. The following option prices are given for YBM, whose stock price equals $99:
Strike Price
95
100
105
Call Price
10.50
2.50
1.50
Put Price
2.00
3.50
11.00
Which of the following statements is correct?
a.
b.
c.
d.
e.
The intrinsic value for 95 call is $4 and for 105 put is $6.
The intrinsic value for 95 call is $4.50 and for 100 put is $2.
The intrinsic value for 100 call is $1 and for 95 put is $4.
The intrinsic value for 105 call is 0 and for 105 put is $5.
None of these answers are correct.
ANS: A
MSC: Applied
DIF: Moderate
REF: 5.3 | 5.4
TOP: Call Options | Put Options
8. If S is the stock price on an option’s expiration date and K is the strike price, then a put seller’s
(writer’s) payoff at expiration is:
a. max(0, S – K)
b. min(0, K – S)
c. max(0, K – S)
d. min(0, S – K)
e. None of these answers is correct.
ANS: D
MSC: Conceptual
DIF: Difficult
REF: 5.3 | 5.4
TOP: Call Options | Put Options
9. BUG’s stock price is $53 and its put price is $4.50 for a strike price of $55. This put option’s intrinsic
value is:
a. $2
b. $2.50
c. $3
d. $4
e. None of these answers are correct.
ANS: A
MSC: Applied
DIF: Easy
REF: 5.4
TOP: Put Options
10. The maximum loss that a writer of a naked put can incur is:
a. 0
b. the stock price
c. unlimited
d. the strike price
e. None of these answers are correct.
ANS: D
MSC: Applied
DIF: Easy
REF: 5.4
TOP: Put Options
REF: 5.4
TOP: Put Options
11. A short put is a:
a. bullish strategy
b. bearish strategy
c. neutral market strategy
d. bet on volatility
e. None of these answers are correct.
ANS: A
MSC: Conceptual
DIF: Moderate
12. Suppose you go both long a call option and short a put option. Both options are on the same
underlying stock and have the same strike price and expiration date. You have created:
a. a short forward
b. a long forward
c. a long futures
d. a short futures
e. None of these answers are correct.
ANS: B
MSC: Applied
DIF: Easy
REF: 5.3 | 5.4
TOP: Call Options | Put Options
13. The primary function of the Options Clearing Corporation (OCC) is to:
a. regulate all options markets
b. act as a clearinghouse for a majority of exchange-traded options
c. regulate all futures markets
d. act as a clearinghouse for all exchange-traded derivative contracts
e. None of these answers are correct.
ANS: B
MSC: Factual
DIF: Easy
REF: 5.5
TOP: Exchange-Traded Options
14. The following contracts have daily settlements:
a. forward contracts
b. futures contracts
c. exchange-traded options
d. options on futures
e. over-the-counter options
ANS: B
MSC: Factual
DIF: Moderate
REF: 5.5
TOP: Exchange-Traded Options
15. Suppose that you find that YBM’s October 100 put has an ask price of $4.10 and a bid price of $4.00.
If you want to buy these put options to protect your holding of 400 YBM shares from declining, what
is your total cost including commission? Assume that the broker charges a commission equal to a flat
fee of $15 plus $2 per contract.
a. $1,623
b. $1,647
c. $1,655
d. $1,663
e. None of these answers are correct.
ANS: D
MSC: Applied
DIF: Moderate
REF: 5.5
TOP: Exchange-Traded Options
16. Suppose that a dealer is quoting an ask/offer price $50.10 and bid price $50.00 for BUG stock. You
would like to sell your holdings of 6,000 BUG shares at a price of $55 or something close to it. To
really ensure that the sell goes through, you should place:
a. a market order at $55
b. a limit sell order at $55
c. a market-if-touched sell order at $55
d. a stop-loss sell order at $55
e. None of these answers are correct.
ANS: C
MSC: Applied
DIF: Moderate
REF: 5.7
TOP: Order Placement Strategies
17. A stop-loss order (or a sell stop order):
a. becomes a market order as soon as a trade takes place at this price, which is higher than
the current market price
b. is a limit sell order above the current market price
c. is a sell order placed at the ongoing current ask price
d. is a sell order placed at a price lower than the current bid price
e. None of these answers are correct.
ANS: D
MSC: Conceptual
DIF: Moderate
REF: 5.7
TOP: Order Placement Strategies
18. An order to buy a put option with a strike price of $100 and simultaneously sell a put option with a
strike price of $105 is an example of:
a. a scale order
b. a spread order
c. a one cancels the other order
d. a switch order
e. None of these answers are correct.
ANS: B
MSC: Conceptual
DIF: Moderate
REF: 5.7
TOP: Order Placement Strategies
19. The current price of platinum is $1,800 per ounce. You are expecting that in three months the price of
platinum will rise above $1,900. You are also worried that there is a small chance platinum’s price
may fall below $1,700. If you are setting up speculative strategies based on your views, you are
unlikely to use which of the following strategies?
a. Buy platinum in the spot market, and place a stop-loss order at $1,700 or a little below.
b. Buy call options on platinum.
c. Buy call options on platinum futures.
d. Buy platinum in the spot market and protect against the downside by buying put options or
put options on platinum futures.
e. Buy platinum futures.
ANS: E
MSC: Applied
DIF: Moderate
REF: 5.7
TOP: Order Placement Strategies