Reading 70: Option Markets and Contracts LOSa习题精选 border, following, statements, face

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LOS a: Define European option, American option, and the concept of moneyness of an option.

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.

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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:

	Writer	Owner
Maximum Loss	unlimited	premium
Maximum Gain	premium	unlimited

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

 

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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.

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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.

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An investor would exercise a put option when the:

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

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

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

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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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Which of the following statements about European and American options is least accurate?

A) European options offer more flexible trading opportunities for speculators.

B) American options are far more common than European options.

C) European options are easier to analyze and value than American options.

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European options are less flexible for traders than American options because of the limitation on when they can be exercised, which is only on the expiration date. Traders gain more flexibility with American options that can be exercised at anytime on or before expiration.

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

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

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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.

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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.

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

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

                      Put                                        Call

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

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

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

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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.

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Which of the following statements about uncovered call options is least accurate?

A) The loss potential to the writer is unlimited.

B) The profit potential to the holder is unlimited.

C) The most the writer can make is the premium plus the difference between the exercise price (X) and the stock price (S).

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The most the writer can make is the premium. If the writer wrote a covered out of the money call, then the writer would make the premium plus the increase in the stock's price X-S.

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A put option currently has an option premium of $3 and a strike price of $40. The market price of the stock is $42 at expiration. The expiration day value of the option is:

A) $0.

B) $2.

C) $5.

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The expiration day value of the put is $0 because it is trading out-of the money.

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What is the primary difference between an American and a European option?

A) American and European options are never written on the same underlying asset.

B) The European option can only be traded on overseas markets.

C) The American option can be exercised at anytime on or before its expiration date.

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American and European options are virtually identical, except exercising the European option is limited to its expiration date only. The American option can be exercised at anytime on or before its expiration date. For the exam, the key concept relating to this difference is the value of the American option must be equal or greater than the value of the corresponding European option, all else being equal.