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Q6. Bidco Corporation common stock has a market value of $30.00. Which statement about put and call options available on Bidco common is most accurate?

A)   A call with a strike price of $25.00 is at-the-money.

B)   A put with a strike price of $35.00 is in-the-money.

C)   A put with a strike price of $20.00 has intrinsic value.

Q7. James Anthony has a short position in a put option with a strike price of $94. If the stock price is below $94 at expiration, what will happen to Anthony’s short position in the option?

A)   The person who is long the put option will not exercise the put option.

B)   He will let the option expire.

C)   He will have the option exercised against him at $94 by the person who is long the put option.

Q8. A European option can be exercised by:

A)   its owner, anytime during the term of the contract.

B)   either party, at contract expiration.

C)   its owner, only at the expiration of the contract.

Q9. Which of the following statements about puts and calls is most accurate?

A)   The most the buyer of a call can lose is the premium.

B)   The most the writer of a call can lose is the stock's price less the premium.

C)   A put holder will exercise the put if the price of the stock is equal to or less than the strike price.

Q10. A call option that is in the money:

A)   has an exercise price less than the market price of the asset.

B)   has an exercise price greater than the market price of the asset.

C)   has a value greater than its purchase price.

Q6. Bidco Corporation common stock has a market value of $30.00. Which statement about put and call options available on Bidco common is most accurate? fficeffice" />

A)   A call with a strike price of $25.00 is at-the-money.

B)   A put with a strike price of $35.00 is in-the-money.

C)   A put with a strike price of $20.00 has intrinsic value.

Correct answer is B)       

A put is in-the-money when its exercise price is higher than the market value of the underlying asset. A put with a $35.00 strike price allows the trader to sell 100 shares of stock for $35.00 per share, which is $5.00 higher than the prevailing market value. This gives the put a value, hence, it is in-the-money. For a call to be in-the-money, its strike price would have to be lower than the market value of the underlying common stock, allowing the trader to purchase 100 shares at a price below the prevailing market value. At-the-money is when the strike price and asset market value are equal. A put with a strike price of $20.00 does not have intrinsic value because it is below the $30 price of the stock. It does have time value meaning it is worth something because there is the possibility the put will come into the money before it expires.

Q7. James Anthony has a short position in a put option with a strike price of $94. If the stock price is below $94 at expiration, what will happen to Anthony’s short position in the option?

A)   The person who is long the put option will not exercise the put option.

B)   He will let the option expire.

C)   He will have the option exercised against him at $94 by the person who is long the put option.

Correct answer is C)

Anthony has sold the right to sell the stock at $94. That is, he received a payment upfront for the payer to have the right but not the obligation to sell the stock at $94. Because the option is in-the-money at expiration, MAX (0, X-S), the holder will exercise his right to sell at $94.

Q8. A European option can be exercised by:

A)   its owner, anytime during the term of the contract.

B)   either party, at contract expiration.

C)   its owner, only at the expiration of the contract.

 Correct answer is C)

A European option can be exercised by its owner only at contract expiration.

Q9. Which of the following statements about puts and calls is most accurate?

A)   The most the buyer of a call can lose is the premium.

B)   The most the writer of a call can lose is the stock's price less the premium.

C)   A put holder will exercise the put if the price of the stock is equal to or less than the strike price.

Correct answer is A)

EXPLANATIONS FOR INCORRECT ANSWERS:

- The potential loss to the writer of a put is limited to the stock price less the premium.

- A put holder will exercise the put if the stock price is less than the strike price. (When the stock's price (S) is equal to the strike price (X), a put option has no value and is said to be at the money.)

THE TABLES AND INFORMATION BELOW PROVIDE MORE DETAILS ON PUTS AND CALLS:

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

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

Note: Trading put options is a zero-sum game. The buyer's profits = the writer's losses.

CALL OPTION: 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.

Q10. A call option that is in the money:

A)   has an exercise price less than the market price of the asset.

B)   has an exercise price greater than the market price of the asset.

C)   has a value greater than its purchase price.

Correct answer is A)

A call option is in the money when the exercise price is less than the market price of the asset.

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