Options Trading: A Comprehensive Guide
1. The value of an option is dependent upon the value of the underlying security. This relationship defines an option as which one of the following?
Derivative security
2. A call option grants its owner which one of the following?
Right to buy
3. By definition, a put option grants its owner which one of the following?
Right to sell
4. Which one of the following is defined as the price at which an option will be exercised?
Strike
5. Which one of the following distinguishes an option as an American style option?
Option that can be exercised at any time prior to expiration
6. Which one of the following is defined as an option that can only be exercised at expiration?
European style option
7. A list of available option contracts and their prices for a particular security listed in order of strike price and maturity date is referred to as which one of the following?
Option chain
8. Which one of the following guarantees that the terms of an exchange-listed option contract are fulfilled when an option is exercised?
Options Clearing Corporation
9. By definition, stock index options would include an option on which one of the following underlying assets?
S&P 500
10. A cash-settled option is defined as an option which does which one of the following?
Entails a cash payment to the holder upon exercise
11. Which one of the following terms is defined as an option that would have a positive payoff if exercised now?
In-the-money option
12. An option that would NOT yield a positive payoff if exercised today is referred to by which one of the following terms?
Out-of-the-money option
13. Which one of the following terms is defined as the payoff that would be received if an option were expiring immediately?
Intrinsic value
14. Which one of the following is equal to the option premium minus the intrinsic value?
Time value
15. Which one of the following refers to selling an option contract?
Writing
16. Which of the following has the obligation to sell a stock at the strike price when an option is exercised?
Call writer
17. Which of the following has the obligation to purchase stock at the strike price when an option is exercised?
Put writer
18. You currently own 300 shares of Microsoft stock. If you purchase options on this stock to protect against future declines in the price of the stock you are implementing which one of the following?
Protective put
19. Selling a call option on stock which you own is referred to as which one of the following strategies?
Covered call
20. Kris implemented an option trading strategy consisting of two call options. This strategy is known as which one of the following? Spread
21. An option trading strategy that utilizes both put and call options is referred to as which one of the following?
Combination
22. Consider both a European put and call that expire in June and have a strike price of $30. The noarbitrage relationship between this put and call is referred to as which one of the following?
Put-call parity
23. Louise just purchased 3 call option contracts on GE stock. How many shares of stock can she buy at the strike price based on these contracts? 300
24. How much option premium per share will you receive if you sell a September $34 put on General Electric stock? $2.52
25. What is the current price per underlying share if you wish to buy a June $32.50 call option on General Electric stock? $0.70
26. At what price will a dealer sell the Jun $34 put on General Electric stock? $1.77
27. You are buying the June call on General Electric stock at $0.19. What amount will you pay per share if you decide to exercise this option? $34.00
28. Which of the following characteristics are correct regarding the old style option quotation system? I. The system is known as OPRA – the Options Price Reporting Authority code II. The system has 3 data elements III. The system has 21 characters IV. The system has 5 characters V. The system is known as the OCC Series Key VI. The root symbol is the underlying stock’s ticker symbol I, II, and IV
29. . Which of the following characteristics are correct regarding the new style option quotation system? I. The system is known as OPRA – the Options Price Reporting Authority code II. The system has 3 data elements III. The system has 21 characters IV. The system has 5 characters V. The system is known as the OCC Series Key VI. The root symbol is the underlying stock’s ticker symbol III, V, and VI
30. The change in the option symbol quotation system was driven by which of the following? I. Advances in technology II. Increase in the number and type of option products III. Difficulty in applying the old system to NASDAQ stocks IV. Difficulty in applying the system to complicated option products I, II, III, and IV
61. Josh owns 2 call options on Foster Glass stock. The exercise price is $47.50 and the stock price at expiration is $49.01. What is the total payoff on the option contracts? $302.00
62. Jennifer purchased 5 put option contracts on Winslow Mfg. stock. The option premium was $0.20 and the strike price was $17.50. On the expiration date, the stock was selling for $17.75 a share. What is the total payoff on the option contracts? $0
63. You purchased 7 put option contracts on Alto Industries. The strike price was $42.50 and the option premium was $1.30. On the expiration date, the stock was valued at $41.40 a share. What is the payoff on the option contracts? $770
64. Tim purchased 3 put option contracts on Western Fields stock. The strike price was $35 and the option premium was $0.60. At expiration, the stock was selling for $35.75. What is the payoff on the option contracts? $0
65. You own one SPX call option with a strike of 1,400. What is the payoff at maturity for this option contract if the S&P 500 index is 1,414? $1,400
66. You purchased one SPX call option with a strike of 1,400. You wrote one SPX call option with the same maturity date and a strike of 1,350. At maturity, what is your payoff if the S&P 500 is at 1,375? -$3,000
67. You purchased one SPX put option with a strike of 1,400. You wrote one SPX put option with the same maturity date and a strike of 1,300. At maturity, what is your total payoff if the S&P 500 index is 1,320? $8,000
68. You own one SPX put option with a strike of 1,400. What is the payoff at maturity for this option contract if the S&P 500 index is 1,422? $0
69. You purchased 6 call options with a $40 strike price at a total cost of $150. On the expiration date, the underlying stock was priced at $39.20. What is the percentage return on your investment? -100 percent
70. You purchased a call option with a $22.50 strike price and a call premium of $0.30. On the expiration date, the underlying stock was priced at $23.40 per share. What is the percentage return on your investment? 200 percent
71. Courtney purchased 5 call options with a $47.50 strike price and a call premium of $1.10. On the expiration date, the underlying stock was priced at $50.60 per share. What is her percentage return on this investment? 181.82 percent
72. Gerold purchased 2 put option contracts at an option premium of $0.95 and a strike price of $40. At expiration, the stock price was $41.25 per share. What is his percentage return? -100 percent
73. Kim Lee purchased 6 put option contracts on Eastern Imports stock at a strike price of $47.50. The option premium was $0.65. At expiration, the stock was valued at $44.90 a share. What is her percentage return? 300 percen
74. You own 8 put option contracts on JL Industrial stock. You paid an option premium of $0.80 for a strike price of $42.50. On the option expiration date, the stock was selling for $41.25 a share. What is your percentage return? 56.25 percent
75. Jasmine purchased one call option with a strike price of $35 when the call premium was $1.10. What is the break-even stock price? $36.10
76. Jeff paid a call premium of $0.25 when he purchased his call option with a strike price of $22.00. What is the break-even stock price? $22.25
77. Russ paid a total of $75 to purchase 5 call options with a strike price of $17.50. What is the breakeven stock price? $17.65
78. You purchased 6 put option contracts on Mountain Builders stock at an option premium of $0.75. The strike price is $25. What is your break-even stock price? $24.25
79. You own 4 put option contracts on ALZ stock. The contracts have a $17.50 strike price and you paid an option premium of $0.40. What is the break-even stock price? $17.10
80. Rosalita purchased a put option with a strike price of $40. She paid a total of $140 for the contract. What is the break-even stock price? $39.60
81. You own 100 shares of Deltona stock which is currently worth $43 a share. You just paid an option premium of $0.85 to buy one put contract on this stock with a strike price of $40. What is the maximum loss per share you are avoiding by purchasing the option contract? $40.00
82. You purchased a put with a strike price of $35 and an option premium of $0.45. You simultaneously bought the stock at a price of $34 a share. What is your profit per share on these transactions if the stock price at expiration is $33.50? $0.55
83. A 4-month call has a strike price of $20. The current underlying stock price is $21.45. What is the intrinsic value of this call? $1.45
84. A 6-month put has a strike price of $42.50. The underlying stock’s price is $40.20. What is the intrinsic value of this put? $2.30
85. A 6-month put has a strike price of $32.50. The underlying stock’s price is $31.10. What is intrinsic value of this put? $1.40
86. A 6-month call has a strike price of $30. The underlying stock is priced at $32.80 and the option premium on the call is $3.40. What is the per share time value of the call? $0.60
87. A 3-month put has a strike price of $47.50 and an option premium of $1.40. The underlying stock is selling for $46.70 per share. What is the time value of the put? $0.60
88. A European call has a strike price of $42.50. The underlying stock’s price is $43.40. What is the lower price bound of this call? $0.90
89. A European 3-month call has a strike price of $35. The stock price is currently $34.30. What is the lower price bound on this call? $0.00
90. A stock is valued at $25.75 a share. A European 6-month call option has a strike price of $25 and an option premium of $1.40. The market rate is 9.5 percent and the risk-free rate is 2.5 percent. What is the price of a European 6-month put option with a $25 strike price? $0.34
91. A 4-month, $25 call option on Teller stock has an option premium of $0.25. The 4-month, $25 put option has an option premium of $0.80. The risk-free rate is 3 percent. The options are European – style. What is the price of Teller stock? $24.20
92. A stock is currently selling for $26.50. A 2-month put option with a strike price of $30 has an option premium of $4.15. The risk-free rate is 2.5 percent and the market rate is 9.75 percent. What is the option premium on a 2-month call with a $30 strike price? Assume the options are European style. $0.77
93. A stock is currently selling for $40.85. A 3-month call option with a strike price of $40 has an option premium of $1.30. The risk-free rate is 2 percent and the market rate is 9.5 percent. What is the option premium on a 3-month put with a $40 strike price? Assume the options are European style. $0.25
94. A call option with 6 months to expiration currently sells for $2.20. A put option with the same expiration sells for $0.50. The options are European style. The risk-free rate is 3.0 percent and the strike price of both options is $50. What is the current stock price? $50.97
95. A call option with 1 month to expiration currently sells for $0.70. A put option with the same expiration sells for $1.10. The options are European style. The risk-free rate is 3 percent and the strike price of both options is $18.00. What is the current stock price? $17.56
96. A call option has a premium of $3.10, a strike price of $55, and 2 months to expiration. The current stock price is $52.20. The stock will pay a $1.25 dividend in one month. The risk-free rate is 2.5 percent. What is the premium on a 2-month put with a strike price of $55? Assume the options are European style. $6.92
97. A call option has a premium of $0.60, a strike price of $40, and 3 months to expiration. The current stock price is $39.60. The stock will pay a $0.80 dividend two months from now. The risk-free rate is 3 percent. What is the premium on a 3-month put with a strike price of $40? Assume the options are European style. $1.50
31. Which of the following issue exchange-listed option contracts? I. CBOE II. SEC III. OCC IV. NASDAQ III only
32. What is the maximum percentage loss you can incur if you buy a put option? 100%
33. Which one of the following statements is correct? Some stock index options close in the morning while others close at the end of the trading day.
34. Which one of the following options is in-the-money? put with a $45 strike and an underlying stock price of $42
35. Which one of the following combinations creates an in-the-money option? put strike price exceeds the underlying stock price
36. Which one of the following options is out-of-the-money? call with a $50 strike and a stock price of $49
37. Which one of the following statements is true? An American style out-of-the-money call option can have a positive value.
38. A decrease in which one of the following will increase the intrinsic value of a put option? underlying stock price
39. You wrote a $40 call option on a stock that has a market price of $43. Which one of the following statements must be correct if the option expires three months from now? Your option currently has a negative payoff.
40. You bought a put with a strike price of $25. The current stock price is $23. What is the current payoff value of this option? $2
41. The maximum option payoff from: writing a put is $0.
42 . he maximum: profit from writing a put is the option premium.
43. Which one of the following is the primary purpose of a protective put? offset the risk associated with a decrease in the value of the underlying asset
44. You own 300 shares of ABC stock. Which one of the following would allow you to receive an option premium in exchange for selling your shares in ABC at the strike price? writing a covered call
45. You wrote a covered call with a strike price of $45 and an option premium of $1.10. Assume the stock price is $44 a share currently and that it falls to $42 a share and remains at that price until the option expires. As a result, you will: keep both your stock and the option premium
46. Which one of the following applies to a naked call? unlimited potential losses
47. Which one of the following is a bull call spread? buying a $20 call and selling a $25 call on the same stock
48. Which one of the following is a bear call spread? buying a $20 call and selling a $15 call on the same stock
49. Anna bought a $40 April call and a $40 April put on the same underlying stock. This strategy is referred to as which one of the following? long straddle
50. A short straddle: obtains its maximum profit when the underlying stock price is equal to the strike price
51. Which one of the following is the upper price bound for the intrinsic value of a European call option on a stock? Max (S – K, 0)
52. Which one of the following is the upper price bound for the intrinsic value of a European put option on a stock? Max (K – S, 0)
53. Which one of the following correctly defines the range of time values for a put option? ≥ $0
54. Which one of the following values is discounted in the put-call parity formula? strike price
55. Which one of the following represents an arbitrage opportunity? PCP-implied put price of $0.30 and put market price of $0.31
56. What is the total option premium you will receive if you sell 5 June $25 calls on Texas Instruments? $3,250
57. What is the total amount you will receive if you sell 10 June $27.50 puts on Texas Instruments? $70
58. How much will it cost to purchase 4 June $27.50 calls on Texas Instruments? $1,720
59. You bought a call option with a strike price of $35. What is your total payoff on this option contract if the underlying stock is selling for $36.70 on the option expiration date? $170.00
60. Katie purchased 4 call options on Atlas Co. stock with a strike price of $37.00. On the expiration date, the stock was priced at $36.95 a share. What is the total payoff on the option contracts? $0
61. Josh owns 2 call options on Foster Glass stock. The exercise price is $47.50 and the stock price at expiration is $49.01. What is the total payoff on the option contracts? $302.00
62. Jennifer purchased 5 put option contracts on Winslow Mfg. stock. The option premium was $0.20 and the strike price was $17.50. On the expiration date, the stock was selling for $17.75 a share. What is the total payoff on the option contracts? $0
63. You purchased 7 put option contracts on Alto Industries. The strike price was $42.50 and the option premium was $1.30. On the expiration date, the stock was valued at $41.40 a share. What is the payoff on the option contracts? $770
64. Tim purchased 3 put option contracts on Western Fields stock. The strike price was $35 and the option premium was $0.60. At expiration, the stock was selling for $35.75. What is the payoff on the option contracts? $0
65. You own one SPX call option with a strike of 1,400. What is the payoff at maturity for this option contract if the S&P 500 index is 1,414? $1,400
66. You purchased one SPX call option with a strike of 1,400. You wrote one SPX call option with the same maturity date and a strike of 1,350. At maturity, what is your payoff if the S&P 500 is at 1,375? -$3,000
67. You purchased one SPX put option with a strike of 1,400. You wrote one SPX put option with the same maturity date and a strike of 1,300. At maturity, what is your total payoff if the S&P 500 index is 1,320? $8,000
68. You own one SPX put option with a strike of 1,400. What is the payoff at maturity for this option contract if the S&P 500 index is 1,422? $0
69. You purchased 6 call options with a $40 strike price at a total cost of $150. On the expiration date, the underlying stock was priced at $39.20. What is the percentage return on your investment? -100 percent
70. You purchased a call option with a $22.50 strike price and a call premium of $0.30. On the expiration date, the underlying stock was priced at $23.40 per share. What is the percentage return on your investment? 200 percent
71. Courtney purchased 5 call options with a $47.50 strike price and a call premium of $1.10. On the expiration date, the underlying stock was priced at $50.60 per share. What is her percentage return on this investment? 181.82 percent
72. Gerold purchased 2 put option contracts at an option premium of $0.95 and a strike price of $40. At expiration, the stock price was $41.25 per share. What is his percentage return? -100 percent
73. Kim Lee purchased 6 put option contracts on Eastern Imports stock at a strike price of $47.50. The option premium was $0.65. At expiration, the stock was valued at $44.90 a share. What is her percentage return? 300 percen
74. You own 8 put option contracts on JL Industrial stock. You paid an option premium of $0.80 for a strike price of $42.50. On the option expiration date, the stock was selling for $41.25 a share. What is your percentage return? 56.25 percent
75. Jasmine purchased one call option with a strike price of $35 when the call premium was $1.10. What is the break-even stock price? $36.10
76. Jeff paid a call premium of $0.25 when he purchased his call option with a strike price of $22.00. What is the break-even stock price? $22.25
77. Russ paid a total of $75 to purchase 5 call options with a strike price of $17.50. What is the breakeven stock price? $17.65
78. You purchased 6 put option contracts on Mountain Builders stock at an option premium of $0.75. The strike price is $25. What is your break-even stock price? $24.25
79. You own 4 put option contracts on ALZ stock. The contracts have a $17.50 strike price and you paid an option premium of $0.40. What is the break-even stock price? $17.10
80. Rosalita purchased a put option with a strike price of $40. She paid a total of $140 for the contract. What is the break-even stock price? $39.60
81. You own 100 shares of Deltona stock which is currently worth $43 a share. You just paid an option premium of $0.85 to buy one put contract on this stock with a strike price of $40. What is the maximum loss per share you are avoiding by purchasing the option contract? $40.00
82. You purchased a put with a strike price of $35 and an option premium of $0.45. You simultaneously bought the stock at a price of $34 a share. What is your profit per share on these transactions if the stock price at expiration is $33.50? $0.55
83. A 4-month call has a strike price of $20. The current underlying stock price is $21.45. What is the intrinsic value of this call? $1.45
84. A 6-month put has a strike price of $42.50. The underlying stock’s price is $40.20. What is the intrinsic value of this put? $2.30
85. A 6-month put has a strike price of $32.50. The underlying stock’s price is $31.10. What is intrinsic value of this put? $1.40
86. A 6-month call has a strike price of $30. The underlying stock is priced at $32.80 and the option premium on the call is $3.40. What is the per share time value of the call? $0.60
87. A 3-month put has a strike price of $47.50 and an option premium of $1.40. The underlying stock is selling for $46.70 per share. What is the time value of the put? $0.60
88. A European call has a strike price of $42.50. The underlying stock’s price is $43.40. What is the lower price bound of this call? $0.90
89. A European 3-month call has a strike price of $35. The stock price is currently $34.30. What is the lower price bound on this call? $0.00
90. A stock is valued at $25.75 a share. A European 6-month call option has a strike price of $25 and an option premium of $1.40. The market rate is 9.5 percent and the risk-free rate is 2.5 percent. What is the price of a European 6-month put option with a $25 strike price? $0.34
91. A 4-month, $25 call option on Teller stock has an option premium of $0.25. The 4-month, $25 put option has an option premium of $0.80. The risk-free rate is 3 percent. The options are European – style. What is the price of Teller stock? $24.20
92. A stock is currently selling for $26.50. A 2-month put option with a strike price of $30 has an option premium of $4.15. The risk-free rate is 2.5 percent and the market rate is 9.75 percent. What is the option premium on a 2-month call with a $30 strike price? Assume the options are European style. $0.77
93. A stock is currently selling for $40.85. A 3-month call option with a strike price of $40 has an option premium of $1.30. The risk-free rate is 2 percent and the market rate is 9.5 percent. What is the option premium on a 3-month put with a $40 strike price? Assume the options are European style. $0.25
94. A call option with 6 months to expiration currently sells for $2.20. A put option with the same expiration sells for $0.50. The options are European style. The risk-free rate is 3.0 percent and the strike price of both options is $50. What is the current stock price? $50.97
95. A call option with 1 month to expiration currently sells for $0.70. A put option with the same expiration sells for $1.10. The options are European style. The risk-free rate is 3 percent and the strike price of both options is $18.00. What is the current stock price? $17.56
96. A call option has a premium of $3.10, a strike price of $55, and 2 months to expiration. The current stock price is $52.20. The stock will pay a $1.25 dividend in one month. The risk-free rate is 2.5 percent. What is the premium on a 2-month put with a strike price of $55? Assume the options are European style. $6.92
97. A call option has a premium of $0.60, a strike price of $40, and 3 months to expiration. The current stock price is $39.60. The stock will pay a $0.80 dividend two months from now. The risk-free rate is 3 percent. What is the premium on a 3-month put with a strike price of $40? Assume the options are European style. $1.50