LOS a: Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of the strategies of buying and selling calls and puts, and indicate the market outlook of investors using these strategies.

Q1. Linda Reynolds pays $2.45 to buy a call option with a strike price of $42. The stock price at which Reynolds earns $3.00 from her call option position is:

A)   $2.45.

B)   $47.45.

C)   $42.00.

Q2. Al Steadman receives a premium of $3.80 for shorting a put option with a strike price of $64. If the stock price at expiration is $84, Steadman’s profit or loss from the options position is:

A)   $23.80.

B)   $16.20.

C)   $3.80.

Q3. Jimmy Casteel pays a premium of $1.60 to buy a put option with a strike price of $145. If the stock price at expiration is $128, Casteel’s profit or loss from the options position is:

A)   $18.40.

B)   $1.60.

C)   $15.40.

Q4. Suppose the price of a share of Stock A is $100. A European call option that matures one month from now has a premium of $8, and an exercise price of $100. Ignoring commissions and the time value of money, the holder of the call option will earn a profit if the price of the share one month from now:

A)   decreases to $90.

B)   increases to $110.

C)   increases to $106.

Q5. A put on Stock X with a strike price of $40 is priced at $3.00 per share; while a call with a strike price of $40 is priced at $4.50. What is the maximum per share loss to the writer of the uncovered put and the maximum per share gain to the writer of the uncovered call?

    Maximum Loss           Maximum Gain
to Put Writer              to Call Writer

A)   $40.00                                   $4.50

B)   $37.00                                   $35.50

C)   $37.00                                   $4.50

Q6. An investor purchases a stock for $40 a share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3/share. Ignoring dividends and transactions cost, what is the maximum profit that the writer of this covered call can earn if the position is held to expiration?

A)   $3.

B)   $5.

C)   $2.

LOS a: Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph of the strategies of buying and selling calls and puts, and indicate the market outlook of investors using these strategies. fficeffice" />

Q1. Linda Reynolds pays $2.45 to buy a call option with a strike price of $42. The stock price at which Reynolds earns $3.00 from her call option position is:

A)   $2.45.

B)   $47.45.

C)   $42.00.

 Correct answer is B)

To earn $3.00, the stock price must be above the strike price by $3.00 plus the premium Reynolds paid to buy the option ($42.00+$3.00+$2.45).

Q2. Al Steadman receives a premium of $3.80 for shorting a put option with a strike price of $64. If the stock price at expiration is $84, Steadman’s profit or loss from the options position is:

A)   $23.80.

B)   $16.20.

C)   $3.80.

 Correct answer is C)

The put option will not be exercised because it is out-of-the-money, MAX (0, X-S). Therefore, Steadman keeps the full amount of the premium, $3.80.

Q3. Jimmy Casteel pays a premium of $1.60 to buy a put option with a strike price of $145. If the stock price at expiration is $128, Casteel’s profit or loss from the options position is:

A)   $18.40.

B)   $1.60.

C)   $15.40.

 Correct answer is C)

The put option will be exercised and has a value of $145-$128 = $17 [MAX (0, X-S)]. Therefore, Casteel receives $17 minus the $1.60 paid to buy the option. Therefore, the profit is $15.40 ($17 less $1.60).

Q4. Suppose the price of a share of Stock A is $100. A European call option that matures one month from now has a premium of $8, and an exercise price of $100. Ignoring commissions and the time value of money, the holder of the call option will earn a profit if the price of the share one month from now:

A)   decreases to $90.

B)   increases to $110.

C)   increases to $106.

 Correct answer is B)

The breakeven point is the strike price plus the premium, or $100 + $8 = $108. Any price greater than this would result in a profit, and the only choice that exceeds this amount is $110.

Q5. A put on Stock X with a strike price of $40 is priced at $3.00 per share; while a call with a strike price of $40 is priced at $4.50. What is the maximum per share loss to the writer of the uncovered put and the maximum per share gain to the writer of the uncovered call?

    Maximum Loss           Maximum Gain
to Put Writer              to Call Writer

A)   $40.00                                   $4.50

B)   $37.00                                   $35.50

C)   $37.00                                   $4.50

Correct answer is C)

The maximum loss to the uncovered put writer is the strike price less the premium, or $40.00 ? $3.00 = $37.00. The maximum gain to the uncovered call writer is the premium, or $4.50.

Q6. An investor purchases a stock for $ffice:smarttags" />40 a share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3/share. Ignoring dividends and transactions cost, what is the maximum profit that the writer of this covered call can earn if the position is held to expiration?

A)   $3.

B)   $5.

C)   $2.

Correct answer is B)