kim226

James Jackson currently owns stock in PNG, Inc., valued at $145 per share. Thinking that PNG is overbought and will decrease in price soon, Jackson writes a call option on PNG with an exercise price of $148 for a premium of $2.40. At expiration of the option, PNG stock is valued at $152 per share. What is the profit or loss from Jackson’s covered call strategy? Jackson:

A) gained $9.40.

B) lost $4.60.

C) gained $5.40.

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The option is in-the-money at expiration (MAX (0, S-X) and the PNG stock will be called away from Jackson at $148 per share, limiting Jackson’s gain from owning the stock to $3 ($148-145). However, Jackson also gains the $2.40 from writing the call option. Therefore, Jackson’s gain from the covered call strategy is $5.40 ($3.00+$2.40).

kim226

In June, Todd Puckett bought stock in SBC Communications for $30 per share. At that time, Puckett sold an equivalent number of call options on SBC with an exercise price of $35 for $2.75. In September, at expiration, the stock is trading at $26. What is Puckett’s profit per share from his covered call strategy? Puckett:

A) gained $1.25.

B) gained $4.00.

C) lost $1.25.

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Since the option is out-of-the-money at expiration (MAX (0, S − X)), the options are worthless. Also, the stock decreased in value from $30 per share to $26 per share, creating a $4 loss. The $4 loss is partially offset by the $2.75 premium Puckett received. Therefore, the loss per share from the covered call position is $1.25 = (–$4 + $2.75).

kim226

Jasper Quartermaine is interested in using the options market to create “insurance” against a severe drop in the value of a stock portfolio that he owns. How could he best accomplish this goal and what is this type of strategy called?

Type of option

Strategy

A) buy put options protective put

B) write call options protective put

C) write call options covered call

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An investor can simulate portfolio insurance by purchasing put options. Losses in the underlying portfolio are offset by gains in the put position. The investor is already long his portfolio and if he buys a long put for his portfolio he is replicating a protective put strategy.

kim226

Which of the following statements about put options is least accurate? The most the:

A) writer can gain is the put premium.

B) writer can lose is the strike price less the premium.

C) buyer can gain is unlimited.

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The most the put buyer can gain is the strike price of the stock less the premium.

kim226

A stock is trading at $18 per share. An investor believes that the stock will move either up or down. He buys a call option on the stock with an exercise price of $20. He also buys two put options on the same stock each with an exercise price of $25. The call option costs $2 and the put options cost $9 each. The stock falls to $17 per share at the expiration date and the investor closes his entire position. The investor’s net gain or loss is:

A) $4 gain.

B) $3 loss.

C) $4 loss.

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The total cost of the options is $2 + ($9 × 2) = $20.
At expiration, the call is worth Max [0, 17-20] = 0.
Each put is worth Max [0, 25-17] = $8.
The investor made $16 on the puts but spent $20 to buy the three options, for a net loss of $4.

kim226

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) $42.00.

C) $47.45.

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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).

kim226

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.

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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.

kim226

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.

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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).

kim226

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 $106.

C) increases to $110.

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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.

kim226

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 to Put Writer

Maximum Gain to Call Writer

A) $40.00 $4.50

B) $37.00 $4.50

C) $37.00 $35.50

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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.