VII. Test
- Please complete this test without referring back to the course material.
- This test contains 20 multiple choice questions, and takes about 30 minutes.
- Good luck !!!
Multiple Choice
1) If you are very bullish on a stock you could _________.
a) buy a put
b) buy a call
c) write a call
d) write a put2) What right and/or obligation does a call holder have?
a) The obligation to sell the stock at the strike price any time until expiry.
b) The right to sell the stock at the strike price any time until expiry.
c) The obligation to buy the stock at the strike price any time until expiry.
d) The right to buy the stock at the strike price any time until expiry.3) What exercise style allows you to exercise the option any time until expiry?
a) American Style
b) Asian Style
c) European Style
d) Western Style4) When is the last trading day for an option?
a) The last business day of the expiry month.
b) The last Friday of the expiry month.
c) The first business day of the expiry month
d) The third Friday of the expiry month5) What right and/or obligation does a put writer have?
a) The obligation to sell the stock at the strike price any time until expiry.
b) The right to sell the stock at the strike price any time until expiry.
c) The obligation to buy the stock at the strike price any time until expiry.
d) The right to buy the stock at the strike price any time until expiry.6) If you want to buy an insurance policy on a stock you own to protect against a possible decline, what option strategy would you use?
a) buy a put
b) buy a call
c) write a call
d) write a put7) A stock is trading at a price of $20. Which of the following statement about options would be correct?
i) A put option with a strike of $17.50 would be in-the-money.
ii) A put option with a strike of $20 would be at-the-money.
iii) A put option with a strike price of $25 would be in-the-money.
iv) A call option with a strike price of $20 would be in-the-money.
v) A call option with a strike price of $17.50 would be out-of-the-money.a) i, iv and v only.
b) i, ii, iv and v only.
c) ii, iv and v only
d) ii and iii only.8) You bought XYZ stock at $14.00, then you wrote a covered call option with a $15 strike price on the stock for a premium of $1.00. If the stock rises to $17.00 what would be your overall profit or loss?
a) $1.00 profit
b) $2.00 profit
c) $3.00 profit
d) $4.00 profit
e) $2.00 loss9) What right and/or obligation does a put holder have?
a) The obligation to sell the stock at the strike price any time until expiry.
b) The right to sell the stock at the strike price any time until expiry.
c) The obligation to buy the stock at the strike price any time until expiry.
d) The right to buy the stock at the strike price any time until expiry.10) Tom bought a speculative put with a strike price of $65 for a premium of $3 at a time the stock was trading at $66. On expiry the underlying stock is trading at a price of $63. What is Tom's profit or loss?
a) $2 profit
b) $3 profit
c) $1 loss
d) $2 loss
e) $3 loss
f) $5 loss
g) $6 loss11) You own a stock and you think that it will perform well over the long term, however you think it will stay within the current price range for the next couple of months. What strategy would be the most suitable?
a) buy a put
b) buy a call
c) write a naked call
d) write a covered call
e) write a naked put
f) write a put that is covered with cash
g) sell the stock now then buy it back in a couple of months.
h) just hold the stock because it should rise in a couple of months12) What is the maximum risk involved in buying a call option?
a) There is no risk involved in buying a call option.
b) The risk is limited to the premium paid.
c) The risk is limited to the strike price.
d) The risk is limited to the strike price plus the premium.
e) There is unlimited risk involved with buying a call option.13) What is time value?
a) The value of the possibility the option will increase in value during the time before expiry.
b) The premium less the intrinsic value.
c) Both a and b.
d) The current premium for the option.14) What right and/or obligation does a call writer have?
a) The obligation to sell the stock at the strike price any time until expiry.
b) The right to sell the stock at the strike price any time until expiry.
c) The obligation to buy the stock at the strike price any time until expiry.
d) The right to buy the stock at the strike price any time until expiry.15) How much risk is taken on when you write a naked call option?
a) There is no risk involved with this position.
b) The maximum risk is the premium on the call option.
c) The maximum risk is the strike price of the call option that is being wrote.
d) The risk involved with this position is unlimited.16) If a stock is trading at $15 and there is a call with a strike price of $14 and a put with a strike prices of $17.50,
a) both the call and put options would be at-the-money.
b) both the call and the put would be in-the-money.
c) both the call and the put would be out-of-the-money.
d) the call would be in-the-money and the put would be out-of-the-money.
e) the call would be out-of-the-money and the put would be in-the-money17) What is the maximum risk involved in writing a naked put option?
a) There is no risk involved with writing a naked put.
b) The risk is limited to the premium of the option.
c) The risk is limited to the strike price less the premium.
d) There is unlimited risk involved with writing a naked put.18) Which statement best describes how time value erodes as an option approaches its expiry date? (Assume that all other factors are unchanged.)
a) Time value will decay at a constant rate as it approaches expiry.
b) The rate at which time value will decay will fluctuate therefore it can not be predicted.
c) Time value will decay at a slower rate as it approaches expiry.
d) Time value will decay at a faster rate as it approaches expiry.19) What is intrinsic value?
a) The value that could be realized by exercising an option then immediately liquidating the position in the underlying.
b) The current premium for the option.
c) The amount of money you could sell the option for
d) The amount of money you would get if you exercised the option.20) If you buy an option that is in the money by $1 for a premium of $3, then on expiry it is in-the-money by $2.50, what is your profit or loss?
a) Your profit is $1.50 ($2.50 in-the-money at expiry - $1.50 in-the-money when you bought the option).
b) Your loss would be $2.00 ($3.00 purchase price - $1.00 in-the-money when purchased).
c) Your loss would be $0.50 ( $3.00 purchase price - $2.50 in-the-money on expiry).
d) You can not determine the profit or loss because we don't know the option's price on expiry.
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