PRACTICE EXAM QUESTIONS ON OPTIONS

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1 PRACTICE EXAM QUESTIONS ON OPTIONS 1. An American put option allows the holder to: A) buy the underlying asset at the strike price on or before the expiration date. B) sell the underlying asset at the strike price on or before the expiration date. C) benefit from a stock price decrease with less risk than short selling the stock. D) b and c. E) a and c. 2. The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call: A) is out of the money. B) is in the money. C) sells for a higher price than if the market price of AT&T stock is $40. D) a and c. E) b and c. 3. Buyers of put options anticipate the value of the underlying asset will and sellers of call options anticipate the value of the underlying asset will: A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) cannot tell without further information 4. A protective put strategy is: A) a long put plus a long position in the underlying asset. B) a long put plus a long call on the same underlying asset. C) a long call plus a short put on the same underlying asset. D) a long put plus a short call on the same underlying asset. E) none of the above. 1

2 5. You purchase one IBM March 100 put contract for a put premium of $6. What is the maximum profit that you could gain from this strategy? A) $10,000 B) $10,600 C) $9,400 D) $9,000 E) none of the above 6. You purchased a call option for $3.45 seventeen days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return? If you do not exercise the call today and it expires, what will be your holding period return? A) 173.9%, -100% B) 73.9%, -100% C) 57.5%, % D) 73.9%, -57.5% E) 100%, -100% 7. To the option holder, put options are worth when the exercise price is higher; call options are worth when the exercise price is higher. A) more; more B) more; less C) less; more D) less; less E) It doesn't matter they are too risky to be included in a reasonable person's portfolio. (SEE NEXT PAGE) 2

3 Questions 8-12 relates to the following information: Stock Strike Calls-Last Puts-Last Price Price May Aug. Nov. May Aug. Nov. AP a ½ ½ ½ ½ b a b 52½ 80 a.45 b a a b 52½ 90 a.10 b a a b BSF a a 25⅝ a 25⅝ ⅝ a a 8. The BSF May call option has a premium of.20. What is the strike price of this option? A. 15 B. 25 C D The BSF May 20 put option: A. Is in-the-money B. Is out-of-the-money C. Is on-the-money D. Will stop trading at 5:30 p.m. Eastern time on the third Friday of the month. 10. The AP May 40 call option: A. Is out-of-the-money B. Is in-the-money C. Is on-the-money D. Will expire on the third Friday of the month 3

4 11. What is the intrinsic value of the BSF August 20 call options? A..37 B C. 6 D. The option has no intrinsic value. 12. What is the time value of the BSF August 20 call options? A..37 B C. 6 D. The option has no time value. 13. Which of the following is TRUE regarding the purchaser of a call option? A. The yield on the purchaser s portfolio would decrease by purchasing the option B. The purchaser would limit the amount of money he could lose if the underlying stock declined C. The purchaser would benefit if the underlying stock declined D. The purchaser would exercise the option if the stock declined Use the following information to answer questions On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share. 14. What would the breakeven point be for Mr. Smith per option? A. $45 B. $48 C. $53 D. $ If the market price of XYZ Corporation was $45 and the calls expired, Mr. Smith would lose: A. $1,000 B. $1,500 C. $2,000 D. $4,000 4

5 Use the following information to answer questions A customer has purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. 16. The buyer of these 10 straddles will have to deposit: A. $ 1,000 B. $ 2,000 C. $ 4,000 D. $10, The buyer's breakeven points will be: I. $46 II. $48 III. $52 IV. $54 A. I and III B. I and IV C. II and III D. II and IV Use the following to answer questions An investor purchases 100 shares of XYZ at 60 and also writes an XYZ What is the investor s maximum potential loss? A. $5,700 B. $6,300 C. $6,500 D. $6,800 5

6 19. If the call is exercised when the market price of XYZ is 70, what is the investor s profit? A. $700 B. $800 C. $1,000 D. $1, What is the intrinsic value and the time value of the call if ABC is trading at 43 and the ABC April 40 call is trading at 4.50? A. Intrinsic value 3; time value 1.50 B. Intrinsic value 3; Time value 4.50 C. Intrinsic value 1.50; time value 3 D. Intrinsic value 4.50; time value 0 ANSWER KEY ON NEXT PAGE 6

7 Answer Key 1. D 2. E 3. D 4. A 5. C 6. B 7. B 8. D 9. B 10. B 11. B 12. A 13. B 14. C 15. B 16. C 17. B 18. A 19. B 20. A 7

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