Q17. Which of the following statements about the potential profits and losses from selling a call is most accurate?

A)   Profits are theoretically unlimited.

B)   Losses are limited to the strike price plus the premium.

C)   Losses are theoretically unlimited.

Q18. Which of the following statements about moneyness is most accurate? When the stock price is:

A)   above the strike price, a put option is in-the-money.

B)   above the strike price, a put option is out-of-the-money.

C)   below the strike price, a call option is in-the-money.

Q19. A put option is “in-the-money” when:

A)   the stock price is lower than the exercise price of the option.

B)   there is no put option with a lower exercise price in the expiration series.

C)   the stock price is higher than the exercise price of the option.

Q20. An out-of-the-money put and an in-the-money call are defined as:

                      Put                                        Call

A)   strike price > market price          market price > strike price

B)   market price > strike price            strike price > market price

C)   market price > strike price            market price > strike price

Q21. Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is:

A)   out-of-the-money by $2.50.

B)   in-the-money by $7.50.

C)   in-the-money by $10.00.

Q22. An investor would exercise a put option when the:

A)   price of the stock is equal to the strike price.

B)   price of the stock is above the strike price.

C)   price of the stock is below the strike price.

Q17. Which of the following statements about the potential profits and losses from selling a call is most accurate? fficeffice" />

A)   Profits are theoretically unlimited.

B)   Losses are limited to the strike price plus the premium.

C)   Losses are theoretically unlimited.

Correct answer is C)

The following table provides the potential payoffs from puts and calls.

	Buyer/Holder		Seller/Writer
	Potential Gain	Potential Loss	Potential Gain	Potential Loss
Call	Unlimited	Premium	Premium	Unlimited
Put	Strike P - Premium	Premium	Premium	Strike P - Premium

Q18. Which of the following statements about moneyness is most accurate? When the stock price is:

A)   above the strike price, a put option is in-the-money.

B)   above the strike price, a put option is out-of-the-money.

C)   below the strike price, a call option is in-the-money.

Correct answer is B)

When the stock price is above the strike price, a put option is out-of-the-money.
When the stock price is below the strike price, a call option is out-of-the-money.

Q19. A put option is “in-the-money” when:

A)   the stock price is lower than the exercise price of the option.

B)   there is no put option with a lower exercise price in the expiration series.

C)   the stock price is higher than the exercise price of the option.

Correct answer is A)

The put option is in-the-money if the stock price is below the exercise price.

Q20. An out-of-the-money put and an in-the-money call are defined as:

                      Put                                        Call

A)   strike price > market price          market price > strike price

B)   market price > strike price            strike price > market price

C)   market price > strike price            market price > strike price

Correct answer is C)

In-the-money put: strike > market; out-of-the-money put: market > strike.
In-the-money call: market > strike; out of the money call: strike > market.

Q21. Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is:

A)   out-of-the-money by $2.50.

B)   in-the-money by $7.50.

C)   in-the-money by $10.00.

Correct answer is B)

The put allows a trader to sell Basil common stock for $7.50 more than the current market value ($55.00 ? $47.50). The trade is normally closed out with a cash settlement, but the trader could buy 100 shares for $47.50 per share and immediately sell them to the option writer for $55.00.

Q22. An investor would exercise a put option when the:

A)   price of the stock is equal to the strike price.

B)   price of the stock is above the strike price.

C)   price of the stock is below the strike price.

Correct answer is C)

A put option gives its owner the right to sell the underlying good at a specified price (strike price) for a specified time period. When the stock's price is less than the strike price a put option has value and is said to be in-the-money.

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