PRACTICE EXAM QUESTIONS ON OPTIONS
1. An American put option allows the holder to:
A) buy the underlying asset at the strike price on or before the expiration date.
B) sell the underlying asset at the strike price on or before the expiration date.
C) benefit from a stock price decrease with less risk than short selling the stock.
D) b and c.
E) a and c.
2. The current market price of a share of AT&T stock is $50. If a call option on this stock
has a strike price of $45, the call:
A)
B)
C)
D)
E)
is out of the money.
is in the money.
sells for a higher price than if the market price of AT&T stock is $40.
a and c.
b and c.
3. Buyers of put options anticipate the value of the underlying asset will __________
and sellers of call options anticipate the value of the underlying asset will:
A)
B)
C)
D)
E)
increase; increase
decrease; increase
increase; decrease
decrease; decrease
cannot tell without further information
4. A protective put strategy is:
A)
B)
C)
D)
E)
a long put plus a long position in the underlying asset.
a long put plus a long call on the same underlying asset.
a long call plus a short put on the same underlying asset.
a long put plus a short call on the same underlying asset.
none of the above.
1
5. You purchase one IBM March 100 put contract for a put premium of $6. What is the
maximum profit that you could gain from this strategy?
A)
B)
C)
D)
E)
$10,000
$10,600
$9,400
$9,000
none of the above
6. You purchased a call option for $3.45 seventeen days ago. The call has a strike price
of $45 and the stock is now trading for $51. If you exercise the call today, what will be
your holding period return? If you do not exercise the call today and it expires, what
will be your holding period return?
A)
B)
C)
D)
E)
173.9%, -100%
73.9%, -100%
57.5%, -173.9%
73.9%, -57.5%
100%, -100%
7. To the option holder, put options are worth ______ when the exercise price is higher;
call options are worth ______ when the exercise price is higher.
A)
more; more
B)
more; less
C)
less; more
D)
less; less
E)
It doesn't matter – they are too risky to be included in a reasonable
person's portfolio.
(SEE NEXT PAGE)
2
Questions 8-12 relates to the following information:
Stock
Price
AP
52½
52½
52½
52½
52½
52½
BSF
25⅝
25⅝
25⅝
Strike
Price
40
45
50
60
70
80
90
15
20
25
30
May
12.50
7.75
3
.25
.05
a
a
10.75
5.50
1.45
.20
Calls-Last
Aug. Nov.
13
a
8.65
10.50
5.85
7.85
2.45
4.15
.85
b
.45
b
.10
b
11
10
6
7.50
3.35 4.50
1.50 1.50
May
.05
.20
1.15
8.65
a
a
a
.05
.05
.75
4.50
Puts-Last
Aug.
Nov.
.70
1.50
1.75
3
3.75
5.25
9.90
10.40
18.75 b
a
b
a
b
a
a
.40
a
1.65
2.15
a
a
8. The BSF May call option has a premium of .20. What is the strike price
of this option?
A.
B.
C.
D.
15
25
25.63
30
9. The BSF May 20 put option:
A.
B.
C.
D.
Is in-the-money
Is out-of-the-money
Is on-the-money
Will stop trading at 5:30 p.m. Eastern time on the third Friday of the
month.
10. The AP May 40 call option:
A.
B.
C.
D.
Is out-of-the-money
Is in-the-money
Is on-the-money
Will expire on the third Friday of the month
3
11. What is the intrinsic value of the BSF August 20 call options?
A.
B.
C.
D.
.37
5.63
6
The option has no intrinsic value.
12. What is the time value of the BSF August 20 call options?
A.
B.
C.
D.
.37
5.63
6
The option has no time value.
13. Which of the following is TRUE regarding the purchaser of a call option?
A. The yield on the purchaser’s portfolio would decrease by purchasing the option
B. The purchaser would limit the amount of money he could lose if the underlying
stock declined
C. The purchaser would benefit if the underlying stock declined
D. The purchaser would exercise the option if the stock declined
Use the following information to answer questions 14-15.
On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3
premium on each call. The current market price of XYZ Corporation is $48 per share.
14. What would the breakeven point be for Mr. Smith per option?
A.
B.
C.
D.
$45
$48
$53
$58
15. If the market price of XYZ Corporation was $45 and the calls expired, Mr. Smith
would lose:
A.
B.
C.
D.
$1,000
$1,500
$2,000
$4,000
4
Use the following information to answer questions 16-17.
A customer has purchased 10 ABC January 50 calls, paying a $2 premium
and 10 ABC January 50 puts, paying a $2 premium. The market price of
ABC stock is $50 per share.
16. The buyer of these 10 straddles will have to deposit:
A.
B.
C.
D.
$ 1,000
$ 2,000
$ 4,000
$10,000
17. The buyer's breakeven points will be:
I.
II.
III.
IV.
$46
$48
$52
$54
A.
B.
C.
D.
I and III
I and IV
II and III
II and IV
Use the following to answer questions 18-19.
An investor purchases 100 shares of XYZ at 60 and also writes an XYZ 65
call @3.
18. What is the investor’s maximum potential loss?
A.
B.
C.
D.
$5,700
$6,300
$6,500
$6,800
5
19. If the call is exercised when the market price of XYZ is 70, what is the
investor’s profit?
A.
B.
C.
D.
$700
$800
$1,000
$1,200
20. What is the intrinsic value and the time value of the call if ABC is
trading at 43 and the ABC April 40 call is trading at 4.50?
A.
B.
C.
D.
Intrinsic value 3; time value 1.50
Intrinsic value 3; Time value 4.50
Intrinsic value 1.50; time value 3
Intrinsic value 4.50; time value 0
ANSWER KEY ON NEXT PAGE
6
Answer Key
1. D
2. E
3. D
4. A
5. C
6. B
7. B
8. D
9. B
10. B
11. B
12. A
13. B
14. C
15. B
16. C
17. B
18. A
19. B
20. A
7