Q7. An investor buys a call option that has an option premium of $5 and a strike price of $22.50. The current market price of the stock is $25.75. At expiration, the value of the stock is $23.00. The net profit/loss of the call position is closest to:

A)   $4.50.

B)   -$4.50.

C)   -$5.00.

Q8. Which of the following statements regarding call options is most accurate? The:

A)   call holder will exercise (at expiration) whenever the strike price exceeds the stock price.

B)   breakeven point for the buyer is the strike price plus the option premium.

C)   breakeven point for the seller is the strike price minus the option premium

Q9. Given the profit and loss diagram of two options at expiration shown below which of the following statements is most accurate?

A)   The maximum profit to the short put is $5

B)   The stock price would have to increase above $45 before the seller of the call starts losing money.

C)   Between a stock price of $40 and $45 the long call’s profit is between $0 and $5.

Q10. Consider a call option with a strike price of $32. If the stock price at expiration is $41, the value of the call option is:

A)   $9.

B)   $0.

C)   $41.

Q11. Mosaks, Inc., has a put option with a strike price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is:

A)   $0.

B)   $10.

C)   $105.

Q12. An investor bought a 15 call for $14 on a stock trading at $20. If the stock is trading at $24 at option expiration, what is the profit and the value of the call at option expiration?

                 Profit          Value of the Call

A)       $1                                   $9

B)       -$5                                  $9

C)       -$5                                  $5

Q7. An investor buys a call option that has an option premium of $5 and a strike price of $22.50. The current market price of the stock is $25.75. At expiration, the value of the stock is $23.00. The net profit/loss of the call position is closest to:fficeffice" />

A)   $4.50.

B)   -$4.50.

C)   -$5.00.

 Correct answer is B)

The option is in-the-money by $0.50 ($23.00 – $22.50). The investor paid $5.00 for the call option, thus the net loss is –$4.50 ($0.50 – $5.00).

Q8. Which of the following statements regarding call options is most accurate? The:

A)   call holder will exercise (at expiration) whenever the strike price exceeds the stock price.

B)   breakeven point for the buyer is the strike price plus the option premium.

C)   breakeven point for the seller is the strike price minus the option premium

Correct answer is B)

The breakeven for the buyer and the seller is the strike price plus the premium. The call holder will exercise if the market price exceeds the strike price.

Q9. Given the profit and loss diagram of two options at expiration shown below which of the following statements is most accurate?

A)   The maximum profit to the short put is $5

B)   The stock price would have to increase above $45 before the seller of the call starts losing money.

C)   Between a stock price of $40 and $45 the long call’s profit is between $0 and $5.

 Correct answer is B)

This is a graph of a long call and a short call at expiration with a $5 option premium and a strike price of $40. Between a stock price of $40 and $45 the long call’s profit is between -$5 and $0. The maximum profit to the short call is $5.

Q10. Consider a call option with a strike price of $32. If the stock price at expiration is $41, the value of the call option is:

A)   $9.

B)   $0.

C)   $41.

Correct answer is A)

The call has a $9 ($41-$32) value at expiration, because the holder of the call can exercise his right to buy the stock at $32 and then sell the stock on the open market for $41. Remember, the intrinsic value of a call at expiration is MAX (0, S-X).

Q11. Mosaks, Inc., has a put option with a strike price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is:

A)   $0.

B)   $10.

C)   $105.

Correct answer is A)

The put has a value of $0 because it will not be exercised. Put value is MAX (0, X-S).

Q12. An investor bought a 15 call for $14 on a stock trading at $20. If the stock is trading at $24 at option expiration, what is the profit and the value of the call at option expiration?

                 Profit          Value of the Call

A)       $1                                   $9

B)       -$5                                  $9

C)       -$5                                  $5

Correct answer is B)

The potential gains on a call purchase are unlimited. With a stock price of $24, the call at 15 is $ffice:smarttags" />9 in the money. By subtracting out the 14 call price a loss of $5 results.

call

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