LOS a, (Part 1): Define European option, American option, and moneyness.

Q1. Which of the following statements about call options at expiration is most accurate?

A)   All of the answers are correct.

B)   The profit potential to the buyer of the option is unlimited.

C)   The call buyer's maximum loss is the call option's premium.

Q2. Which of the following statements about options is most accurate?

A)   Most options throughout the world are European options.

B)   A put writer who deposits shares of the underlying stock has written a covered put.

C)   For call options, the lower the strike price relative to the stock's underlying price, the more the call option is worth.

Q3. Which of the following statements about put and call options at expiration is least accurate?

                          Put                                                                                                        Call

A) The maximum gain to the buyer is unlimited.                       The maximum loss to the writer is the premium.

B) The maximum loss to a writer is their cost on the stock less the premium  The maximum gain to the buyer is unlimited.

C) The maximum gain to the buyer is limited to the stock price less the premium price.  The maximum gain to the buyer is unlimited.

Q4. Regarding buyers and sellers of put and call options, which of the following statements concerning the resulting option position is most accurate? The buyer of a:

A)   call option is taking a long position and the buyer of a put option is taking a short position.

B)   call option is taking a long position while the seller of a put is taking a short position.

C)   put option is taking a short position and the seller of a call option is taking a short position.

Q5. Consider a put option on Deter, Inc., with an exercise price of $45. The current stock price of Deter is $52. What is the intrinsic value of the put option, and is the put option at-the-money or out-of-the-money?

        Intrinsic Value                      Moneyness

A)     $7                                  At-the-money

B)     $7                                Out-of-the-money

C)     $0                                Out-of-the-money

LOS a, (Part 1): Define European option, American option, and moneyness. fficeffice" />

Q1. Which of the following statements about call options at expiration is most accurate?

A)   All of the answers are correct.

B)   The profit potential to the buyer of the option is unlimited.

C)   The call buyer's maximum loss is the call option's premium.

Correct answer is A)

A call option gives its owner the right to purchase an underlying good at a specified price for a specified period of time. When the stock's price (S) is above the strike price (X), a call option has value and is said to be in the money.

The table below summarizes the maximum loss and gain for the call writer/owner:

Note: Trading call options is a zero-sum game. The long profits = the short losses.

Q2. Which of the following statements about options is most accurate?

A)   Most options throughout the world are European options.

B)   A put writer who deposits shares of the underlying stock has written a covered put.

C)   For call options, the lower the strike price relative to the stock's underlying price, the more the call option is worth. Correct answer is C)

The other statements are false. Most options throughout the world are American options. A call writer who deposits shares of the underlying stock has written a covered call.

Q3. Which of the following statements about put and call options at expiration is least accurate?

                          Put                                                                                                        Call

A) The maximum gain to the buyer is unlimited.                       The maximum loss to the writer is the premium.

B) The maximum loss to a writer is their cost on the stock less the premium  The maximum gain to the buyer is unlimited.

C) The maximum gain to the buyer is limited to the stock price less the premium price.  The maximum gain to the buyer is unlimited.

Correct answer is A)

The maximum gain to the buyer of a put is limited to the value of the stock less the premium.

The maximum loss to the writer of a call is unlimited.

Q4. Regarding buyers and sellers of put and call options, which of the following statements concerning the resulting option position is most accurate? The buyer of a:

A)   call option is taking a long position and the buyer of a put option is taking a short position.

B)   call option is taking a long position while the seller of a put is taking a short position.

C)   put option is taking a short position and the seller of a call option is taking a short position.

Correct answer is B)

The buyers of both puts and calls are taking long positions in the options contracts (but the buyer of a put is establishing a potentially short exposure to the underlying), while writers (sellers) of each are taking short positions in the options contracts.

Q5. Consider a put option on Deter, Inc., with an exercise price of $45. The current stock price of Deter is $52. What is the intrinsic value of the put option, and is the put option at-the-money or out-of-the-money?

        Intrinsic Value                      Moneyness

A)     $7                                  At-the-money

B)     $7                                Out-of-the-money

C)     $0                                Out-of-the-money

Correct answer is C)

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