Question 1

Buying a stock index option reduces systematic risk.

Accepted Answer

A) True 
 B)False  False

Question 2

A covered call is constructed by buying the stock and selling the call.

Accepted Answer

A) True 
 B)False

Question 3

The intrinsic value of a put is the price of the stock minus the put's strike price.

Accepted Answer

A) True 
 B)False

Question 4

The intrinsic value of a call option is the strike price minus the stock's price.

Accepted Answer

A) True 
 B)False

Question 5

The intrinsic value of an option to buy stock rises as

Accepted Answer

A)  the strike price increases and the price of the stock declines
B)  the strike price increases and the price of the stock rises
C)  the strike price decreases and the price of the stock declines
D)  the strike price decreases and the price of the stock rises

Question 6

A writer of a naked call option will lose money if the price of the stock declines.

Accepted Answer

A) True 
 B)False

Question 7

A warrant is the option to buy one share of stock at $40. It expires after one year and currently sells for $10. The price of the stock is $32. What is the maximum possible profit if an investor buys one share of stock and shorts one warrant? What is the range of stock prices that yields a profit on this position?

Accepted Answer

a. and b. (This problem replicates the same position as a covered call except that it applies to a warrant instead of a call.)The maximum possible profit on the position consisting of one share purchased to one warrant sold short is the time premium, which in this case is $8 ($10 -$2). All prices of the stock greater than $22 generate a profit, and all prices greater than $30 generate the maximum $8 profit.

Question 8

There is no limit to the potential loss from buying a call option.

Accepted Answer

A) True 
 B)False  False

Question 9

The time premium paid for an option to buy stock is affected by

Accepted Answer

A)  the length of time to expiration
B)  the firm's credit rating
C)  the existence of a rights offering
D)  the firm's financial statements

Question 10

The time period to expiration for call options is usually less than a year.

Accepted Answer

A) True 
 B)False

Question 11

The writer of a call option does not receive any dividends paid by the firm.

Accepted Answer

A) True 
 B)False

Question 12

If an investor is bearish, he or she should not buy a stock index call option.

Accepted Answer

A) True 
 B)False

Question 13

If an investor constructs a covered call,

Accepted Answer

A)  there is no limit to the potential profit
B)  risk is increased
C)  risk is reduced
D)  the term of the position is increased

Question 14

A call is an option to

Accepted Answer

A)  sell stock at a specified price
B)  buy stock at a specified price
C)  deliver stock at a specified price
D)  deliver bonds at a specified price

Question 15

Selling a covered call option is comparable to selling a stock short.

Accepted Answer

A) True 
 B)False

Question 16

While individuals can write call options, they can only buy put options.

Accepted Answer

A) True 
 B)False

Question 17

Calls are options to sell stock at a specified price within a specified time period.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following assumes higher stock prices?
1. buying a stock index call
2. buying a stock index put
3. selling a stock index call
4. selling a stock index put

Accepted Answer

A)  1 and 3
B)  1 and 4
C)  2 and 3
D)  2 and 4

Question 19

Warrants are issued by

Accepted Answer

A)  individuals
B)  firms
C)  governments
D)  investors

Question 20

The buyer of a call option wants the price of the stock to rise.

Accepted Answer

A) True 
 B)False

Exam 17: An Introduction to Options

Buying a stock index option reduces systematic risk.

Correct Answer
verified
False

A covered call is constructed by buying the stock and selling the call.

Correct Answer
verified

The intrinsic value of a put is the price of the stock minus the put's strike price.

Correct Answer
verified

The intrinsic value of a call option is the strike price minus the stock's price.

Correct Answer
verified

The intrinsic value of an option to buy stock rises as

Correct Answer
verified

A writer of a naked call option will lose money if the price of the stock declines.

Correct Answer
verified

There is no limit to the potential loss from buying a call option.

Correct Answer
verified
False

The time premium paid for an option to buy stock is affected by

Correct Answer
verified

The time period to expiration for call options is usually less than a year.

Correct Answer
verified

The writer of a call option does not receive any dividends paid by the firm.

Correct Answer
verified

If an investor is bearish, he or she should not buy a stock index call option.

Correct Answer
verified

If an investor constructs a covered call,

Correct Answer
verified

A call is an option to

Correct Answer
verified

Selling a covered call option is comparable to selling a stock short.

Correct Answer
verified

While individuals can write call options, they can only buy put options.

Correct Answer
verified

Calls are options to sell stock at a specified price within a specified time period.

Correct Answer
verified

Which of the following assumes higher stock prices? 1. buying a stock index call 2. buying a stock index put 3. selling a stock index call 4. selling a stock index put

Correct Answer
verified

Warrants are issued by

Correct Answer
verified

The buyer of a call option wants the price of the stock to rise.

Correct Answer
verified

Exam 17: An Introduction to Options

Buying a stock index option reduces systematic risk.

Correct AnswerverifiedFalse

A covered call is constructed by buying the stock and selling the call.

Correct AnswerverifiedShow Answer

The intrinsic value of a put is the price of the stock minus the put's strike price.

Correct AnswerverifiedShow Answer

The intrinsic value of a call option is the strike price minus the stock's price.

Correct AnswerverifiedShow Answer

The intrinsic value of an option to buy stock rises as

Correct AnswerverifiedShow Answer

A writer of a naked call option will lose money if the price of the stock declines.

Correct AnswerverifiedShow Answer

There is no limit to the potential loss from buying a call option.

Correct AnswerverifiedFalse

The time premium paid for an option to buy stock is affected by

Correct AnswerverifiedShow Answer

The time period to expiration for call options is usually less than a year.

Correct AnswerverifiedShow Answer

The writer of a call option does not receive any dividends paid by the firm.

Correct AnswerverifiedShow Answer

If an investor is bearish, he or she should not buy a stock index call option.

Correct AnswerverifiedShow Answer

If an investor constructs a covered call,

Correct AnswerverifiedShow Answer

A call is an option to

Correct AnswerverifiedShow Answer

Selling a covered call option is comparable to selling a stock short.

Correct AnswerverifiedShow Answer

While individuals can write call options, they can only buy put options.

Correct AnswerverifiedShow Answer

Calls are options to sell stock at a specified price within a specified time period.

Correct AnswerverifiedShow Answer

Which of the following assumes higher stock prices? 1. buying a stock index call 2. buying a stock index put 3. selling a stock index call 4. selling a stock index put

Correct AnswerverifiedShow Answer

Warrants are issued by

Correct AnswerverifiedShow Answer

The buyer of a call option wants the price of the stock to rise.

Correct AnswerverifiedShow Answer

Correct Answer
verified
False

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
False

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified